Information Technology and Productivity Changes in the Banking Industry

This paper analyses the effects of investment in information technologies (IT) in the financial sector using micro‐data from a panel of 600 Italian banks over the period 1989–2000. Stochastic cost and profit functions are estimated allowing for individual banks’ displacements from the best practice frontier and for non‐neutral technological change. The results show that both cost and profit frontier shifts are strongly correlated with IT capital accumulation. Banks adopting IT capital‐intensive techniques are also more efficient. On the whole, over the past decade IT capital‐deepening contribution to total factor productivity growth of the Italian banking industry can be estimated in a range between 1.3 and 1.8 per cent per year.