Information Technology (IT) is the electricity of the 21st century. Like electricity, IT is becoming ubiquitous, not just in the well-known shape of a Personal Computer with monitor and keyboard, but as part of everyday devices such as cars and televisions. Like electricity, IT is increasingly accessible through networks that reach into every office and home. Like electricity, there are few tasks that cannot be handled more effectively or efficiently through the use of IT. As a result, IT is bound to affect people's lives as fundamentally and as broadly as electricity did.

Two recent newspaper articles illustrate this role of IT as a general purpose technology. On August 27, the Wall Street Journal published an article titled "Appliances and Office Ware Become Chip-Equipped and Hook in to the Net" (WSJ 1998). On the same day the New York Time ran an article about the increasing use of computers in cars titled "Fill It Up, With RAM: Cars Get More Megs Under the Hood" (NYT 1998). The increased diffusion of IT is best illustrated by the rapid growth of the Internet. Figure 1 graphs the number of host computers connected to the Internet (Network Wizards 1998).

Figure 1: Number of Internet Hosts

As Figure 1 shows the growth has been exponential over six orders of magnitude during the last two decades.

A crucial part of these changes will be a transformation of the workplace. Historically, changes in the organization of production have been closely related to other social changes. The formation of large firms during the Industrial

Revolution was an important factor contributing to urbanization. It also contributed to huge changes in the income distribution away from the owners of land towards the owners of capital. Even changes in the structure of families from the extended family to the nuclear family are partially a result of the formation of large enterprises. There are already some observable changes of the "Information Revolution." For instance, the emergence of new regions, such as Silicon Valley or Utah are clearly related to the growth of the IT industry. Similarly, there is evidence relating information work to changes in the income distribution (e.g. Autor 1997).

The three papers in this thesis are therefore devoted to understanding how IT has and will continue to affect the organization of firms:

  • IT and Firm Size
    The anecdotal evidence on changes in firm size is mixed. While spin-offs and downsizing suggest a trend towards smaller firms, the recent wave of mergers points to a trend towards larger firms. The paper analyzes US Business Census data to examine trends in firm size empirically and relate them to the use of IT. This exploratory study shows that the trends vary considerably across sectors: IT appears to be associated with a trend towards smaller firms in traditional manufacturing industries and a trend towards larger firms in information-based industries. The paper suggests a possible explanation by considering the combined effect of multiple mechanisms through which IT may affect firm size.

  • IT and Hybrid Organizations
    There appears to be a shift away from both large bureaucratic organizations and individually competing entrepreneurs to "hybrid organizations" For instance, horizontal and networked organizations attempt to combine the initiative shown by entrepreneurs with the coordination achieved in bureaucracies. The paper models a tradeoff between initiative and coordination encountered in organization design. Improved IT is shown to relax this tradeoff, so that hybrid organizations can achieve both more initiative and more coordination. The results from the model are used to analyse the organizational design issues faced by hybrid organization. A case study of Siemens Nixdorf Information Systems (SNI) is used to illustrate the managerial implications.

  • Costly Communication
    IT has dramatically improved the ability to communicate information in organizations. The effects of improved communication are difficult to analyze in traditional economic models since these generally assume free communication. Previous economic theories of communication have substantial shortcomings. The paper proposes a novel approach based on the concept of communication protocols from information theory. It is shown how optimal protocols can be characterized. The properties of optimal protocols are then used to analyze the effect of improvements in communication on the standardization of organizational communication and on the allocation of decision rights.

While all three papers employ the tools of economic analysis, they differ substantially in their mix of theory and evidence. "Costly Communication" is mostly theoretical, addressing fundamental issues of modeling communication. "IT and Hybrid Organizations" is more applied, using incentive theory to analyze the effects of different information systems on organizational design. Finally, "IT and Firm Size" is almost entirely empirical, presenting trends, simple correlations, and some exploratory regressions of statistical evidence for changes in the organization of firms.

In combination, the three papers present both theoretical arguments and empirical evidence to support the contention that IT is a general purpose technology of equal if not greater importance and effect than electricity. An in-depth understanding of the resulting changes in the organization of firms is therefore highly relevant for the education of current and future managers. The papers aim to contribute to this understanding.


Alitor, D., L. Katz, et al. (1997). "Computing Inequality: Have Computers Changed the Labor Market?" National Bureau of Economic Research, mimeo.

Network Wizards (1998). Internet Host Statistics at

New York Time (1998). "Fill It Up, With RAM: Cars Get More Megs Under the Hood." August 27,1998, p. Gl.

Wall Street Journal (1998). "Appliances and Office Ware Become Chip-Equipped and Hook into the Net." August 27,1998, p. Al.