Does Information Technology Lead to Smaller Firms?

Among the many recent changes in the organization of work in the United States, the decline in the average size of firms, as measured by employment, has been particularly well-documented. The primary goal of this paper is to assess the hypothesis that the rapid growth of information technology is at least partially responsible for this shift to smaller firms. We use industry-level data on information technology capital and four measures of firm size, including employees per firm, from different sources to examine this hypothesis. We find broad evidence that investment in information technology is significantly associated with subsequent decreases in the average size of firms. We also find that the effects of information technology on organizations are most pronounced after a lag of two to three years.