How does broadband internet affect firm-level labor misallocation: The role of information frictions

Abstract

This study examines an understudied channel through which information and communication technology (ICT) affects labor markets: specifically, its role in enhancing labor allocation efficiency by mitigating information frictions. To investigate this causal relationship, we take advantage of the natural experiment created by the arrival of broadband internet in China in 2000. We employ a difference-in-differences (DiD) estimation strategy, supplemented by instrumental variables (IV) derived from the average incidence rates of lightning and a theoretically optimal backbone network construction plan. Our results show that the arrival of broadband internet markedly alleviates information frictions in labor markets, leading to a significant reduction in firm-level labor misallocation. The effects arising from the decline in information frictions ease the labor shortage problem faced by firms and are more significant in areas with more developed information-sharing networks. Lastly, we estimate the lower bound of the effect of changes in misallocation on treated cities' aggregate productivity, which is 6.3%.