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To study the effects of new information technologies (IT) on productivity, we have assembled a unique data set on plants in one narrowly defined industry-valve manufacturing-and analyze several plant-level mechanisms through which IT could promote productivity growth. The empirical analysis reveals three main results. First, plants that adopt new IT-enhanced equipment also shift their business strategies by producing more customized valve products. Second, new IT investments improve the efficiency of all stages of the production process by reducing setup times, run times, and inspection times. The reductions in setup times are theoretically important because they make it less costly to switch production from one product to another and support the change in business strategy to more customized production. Third, adoption of new IT-enhanced capital equipment coincides with increases in the skill requirements of machine operators, notably technical and problem-solving skills, and with the adoption of new human resource practices to support these skills. (c) 2007 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology..

How can managers elicit the best performance from their workforce? Economists have written extensively on this question, often focusing on various types of incentive pay contracts aimed at eliciting greater effort from employees. This theoretical research identifies features of employment relationships that limit the effectiveness of simple piece-rate incentive pay plans and that force managers to consider other forms of incentive pay. In addition, managers introduce other human resource management practicesconcerning employee training, hiring criteria, teamwork, job design and employee hierarchies-that are aimed at eliciting optimal performance (see reviews in Gibbons, 1998;Gibbons and Waldman, 1999; Lazear, 1999;Murphy, 1999; and Prendergast, 1999). Still, without empirical evidence on businesses' human resource practices, it will remain an open question whether the theories proposed in "personnel economics [are] real or merely a series of clever models proposed by abstract thinkers who have little contact with reality" (Lazear, 1999).In this study, we describe a new research approach-an approach we label "insider econometrics"-that is aimed at producing empirical estimates of the value of alternative human resource management practices. This "insider" approach goes deep inside businesses to understand how human resource management practices affect specific production processes. Using this insider approach, the analyst is

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