Technology Adoption Costs and Productivity Growth: The Transition to

Abstract: Using two panels of U.S. manufacturing industries, this paper estimates capital adjustment costs from 1961 to 1996. I find that from 1974-83 adjustment costs rose sharply—they more than doubled from about 3 % of output to around 7%. Moreover, this increase is specifically associated with a shift to investment in information technology. But such large adoption costs imply that the Solow residual mismeasures productivity growth: adoption costs are resource costs representing an unmeasured investment. I find that when this investment is included, productivity grew about 0.4 % per annum faster than official measures during the 70’s and early 80’s, reducing the size of the productivity “slowdown. ” Indeed, estimated productivity growth rates were roughly the same from 1974-88 as from 1949-73. Thus technology transitions critically affect productivity growth measurement