Decision Support Systems 59 (2014) 274–285

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Decision Support Systems

journal homepage: www.elsevier.com/locate/dss

IT governance and business value in the public sector

organizations — The role of elected representatives in IT
governance and its impact on IT value in U.S. state governments
Min-Seok Pang ⁎
Fox School of Business, Temple University, 1801 Liacouras Walk, Philadelphia, PA 19122, USA

a r t i c l e i n f o a b s t r a c t

Article history: This paper studies IT business value in the public sector organizations, to which the information systems (IS)
Received 19 March 2013 literature so far has paid little attention. Specifically, we investigate the moderating effect of IT governance on
Received in revised form 26 December 2013 the relationship between IT investments and government performance. Drawing upon the theory of political con-
Accepted 27 December 2013
trol on bureaucracy from the political sciences literature, we hypothesize that the presence of legislative controls
Available online 4 January 2014
on IT management increases returns to IT spending, which are measured by cost efficiency. Our empirical analysis
Keywords:
in the context of U.S. state governments shows that formal establishment of a chief information officer (CIO) po-
Business value of IT sition by legislation is a key prerequisite to positive returns from IT expenditures in state governments. Also, the
IT governance impact of IT spending on state cost efficiency increases when a state senate approves appointment of CIO nom-
U.S. state government ination than when it does not. This study contributes to the IS literature by demonstrating the importance of
Cost efficiency elected representatives as part of IT governance in the public sector organizations.
Theory of political control © 2014 Elsevier B.V. All rights reserved.
Principal–agent model

1. Introduction marketing or supply chain capabilities [7,74], innovative, responsive IT

The public sector organizations are large consumers of information
technologies (IT). Vivek Kundra, the former CIO of the U.S. federal gov-
ernment, stated that it spends as much as $80 billion every year in IT
[21, p. 56]. Governments in the U.S. at all levels – federal, state, and
local levels – are strategically using IT for a variety of purposes ranging
from maintaining operational infrastructures to delivering responsive
public services and interacting with citizens [49]. For instance, state
governments extensively utilize IT in administrating Medicaid, the
healthcare benefit programs for low-income residents [54], which con-
sume a substantial share of state expenditures [48]. Thus, information
systems (IS) researchers as well as citizens, who pay taxes for IT spend-
ing, may ask a fundamental question; Does every dollar spent in IT help
governments fulfill their objectives and create sufficient value for the
public? To the best of our knowledge, however, IS researchers have
shed little light on the IT value in the government sector, compared to
a sheer number of the studies at the for-profit business setting.
IS researchers have been interested in identifying complementary
organizational practices with IT investments [42]. In this research
stream, scholars aim to identify the specific context in which firms are
able to realize greater value from their IT investments. A broad range
of studies have identified a variety of factors such as improved human
resource practices [8], business process reengineering [63], enhanced
⁎ Tel.: +1 215 204 7676.
E-mail address: mins.pang@gmail.com.
management practices [31,64], and analytic capabilities [66]. These
studies demonstrate that firms that possess such complementary fac-
tors can better exploit IT resources to improve organizational perfor-
mance and to achieve sustainable competitive advantages.
In line of this research stream, considering IT governance a comple-
mentary practice in the relationship between IT and organizational
performance, we examine the moderating effect of IT governance on
the relationship between IT spending and performance, measured by
cost efficiency, in U.S. state governments. In particular, this study focuses
on the role of elected representatives in IT governance. Our reading of IT
governance studies indicates that they have mainly focused on the agen-
cy side — the role of CIOs, CEOs, or other senior executives [3,28,61,62].
To the best of our knowledge, most IT governance studies have notably
missed the other key part of IT governance, which the principal–agent
model calls principals — board of directors in business firms or elected
lawmakers in the public sector. Thus, we ask: what is the role of legisla-
ture in IT governance in the public sector organizations?
Drawing upon the theory of political control on bureaucracy from
the political sciences literature [5,11,38], we maintain that IT gover-
nance is more effective when legislative branches are involved in con-
trolling and monitoring IT management. Rooted in the principal–agent
model [45], the political control theory explains how elected represen-
tatives (i.e. principals) control unelected bureaucrats (i.e. agents). In
contemporary government administration, politicians do not have as
sufficient information and expertise in administration as agency officials
do [6,40]. Thus, there exist information asymmetry and moral hazards

0167-9236/$ – see front matter © 2014 Elsevier B.V. All rights reserved.
http://dx.doi.org/10.1016/j.dss.2013.12.006
 M.-S. Pang / Decision Support Systems 59 (2014) 274–285
in this setting, in which the agents may pursue their self-interests which
are divergent from those of the principals and their constituents [39]. As
we will discuss below, such information asymmetry and moral hazards
may exist in IT management as well. We consider the following control
mechanisms that are available to lawmakers in supervising bureaucratic
IT management — direct oversight on IT management and operation,
establishment of a chief information officer (CIO) position by legislation,
and approval of a CIO appointment. We hypothesize that the impact of
IT spending on state cost efficiency is greater in the presence of these
controls on IT management.
Our empirical analysis proceeds in two stages. First, we measure cost
efficiency of U.S. state governments with stochastic cost frontier estima-
tion [1,40]. In the second stage, we estimate the effect of IT spending on
cost efficiency and the moderating effects of legislative controls. This
two-stage estimation produces several interesting findings. First, it re-
veals that legislative establishment of a CIO position accentuates the im-
pact of IT investments on cost efficiency significantly. Further, the
approval of a CIO appointment by a legislative body increases efficient
returns from IT spending as well. Finally, contrary to the predictions
from theory, we find that the presence of an IT-related committee in
the legislature attenuates the impact of IT spending on cost efficiency.
This study contributes to the literature on IT business value and IT
governance on several fronts. First, we expand the boundary of IT
value research to the public sector organizations, an unchartered
territory in the IS literature. We also find that IT governance is a key
moderator in the performance effect of IT investments. Specifically, we
examine the role of principals (i.e. legislatures) in IT governance,
compared to other IT governance studies that mainly focus on agents
(i.e. chief executive, CIO, or other business executives) in IT manage-
ment. We offer a new finding to the IS literature that the involvement
of principals in IT management helps organizations utilize IT resources
more effectively. We also contribute to the literature by recombining
research from two distant literatures (IS and political sciences) [15],
an approach that, to the best of our knowledge, few IS studies have
attempted.
This study also offers several important managerial implications for
the public sector organizations. Our findings emphasize that elected
lawmakers be a key part of IT governance. They need to control and
supervise bureaucracy in IT management, so that IT resources are de-
ployed and used at the areas that are mostly needed from the strategic
standpoint in a timely manner. It is also their responsibility to legitimize
the CIO position and to put a right person in that position who is capable
of fulfilling the roles charged by the legislatures.
The remainder of this paper is organized as follows. The next section
presents our literature review and hypotheses. Section 3 introduces our
empirical approach. The result is presented in Section 4. Section 5 con-
cludes the paper with discussions, limitations, and future research
directions.
2. Literature review and hypotheses
2.1. Prior studies on IT governance and organizational performance
Weill and Ross [73] define IT governance as “specifying the decision
rights and accountability framework to encourage desirable behavior in
using IT” (p. 2). Several prior studies have focused on identifying an
appropriate framework of IT governance in business organizations
[43,71–73]. For example, Brown and Magill [9], Sambamurthy and
Zmud [68], and Xue et al. [77] identify the antecedents for IT governance
arrangement choices among various IT governance archetypes. Such
antecedents include corporate governance models, corporate strategies,
IT knowledge of business divisions, and power of an IT organization. Xue
et al. [78] study the relationship between environmental uncertainty
and IT governance centrality.
Several studies in IT governance examine the impact of IT
governance on firm performance. Gu et al. [27] demonstrate that IT
275
governance misalignment, a discrepancy between an appropriate
IT governance scheme and an actual governance mode, neutralizes
the contribution of IT to firm performance. Preston et al. [62] show
that a CIO's structural power within an organization and a strong
partnership between the CIO and top management team (TMT) posi-
tively contribute to the CIO's strategic decision making authority,
which in turn positively affects the perceived contribution of IT to
firm performance. Banker et al. [3] reveal that alignment of a CIO–CEO
reporting structure with a firm's strategic position has a positive impact
on firm performance. Specifically, they find that a CIO–CEO reporting
relationship leads to higher firm performance under a differentiation
strategy, while a CIO–CFO relationship is positively associated with
firm performance under a cost leadership strategy.
Our study differs from these previous studies on IT governance in
two ways. First, we study the impact of IT governance on performance
in the public sector, which is a new setting in IT governance research.
We explain why cost efficiency is a valid indicator for government per-
formance in Section 2.2. Second, while most prior work in IT governance
focuses on the agency side of IT governance as in the power of CIO or IT
management centrality, we take a closer look at the principal side of IT
governance with a lens of the principal–agent theory and investigate
the performance effect of legislative controls on IT management and in-
vestments. In Section 2.3, we elaborate how the principals in govern-
ments can supervise IT management.
2.2. Cost efficiency as government performance
State governments have been experiencing fiscal crises since the
early 1990s. By 1991, the total deficits in the U.S. state and local govern-
ments reached at $43.1 billion and have continued to rise since then
[60,65]. This is attributed to, among others, growing senior population,
mounting healthcare costs, and rising crime rates, all of which have
caused expenditure growth in such areas as public welfare and correc-
tions [60]. Furthermore, Reschovsky [65] reports that state tax revenues
had declined by 20% from 2001 to 2003, while the real U.S. GDP had in-
creased by about 15% for the same period. The expansion in federally
mandated programs that are not fully subsided by the federal govern-
ment has exacerbated this problem [2].
In addition, in most U.S. states, state laws enact a variety of measures
to limit expenditure growth such as balanced budget requirements and
debt limitations [14,33]. For example, the Idaho State Constitution
requires that its legislature pass a balanced budget. Louisiana state
laws mandate that “if a deficit exists in any fund at the end of the fiscal
year, that deficit shall be eliminated no later than the end of the next fis-
cal year.” According to the National Association of State Budget Officers,
governors in 44 states must submit a balanced budget [47].
Therefore, these factors – accumulated budget deficits, declining tax
revenues, increasing demands for public services, and balanced budget
requirements – pose elected executives, public officials, and politicians
in U.S. states an enormous challenge to improve cost efficiency in state
administration. In other words, the states have to provide a range of
public services that various laws and policies mandate to deliver with
as limited resources as possible. This motivation to minimize costs is
in contrast to for-profit firms, whose primary interests are to maximize
sales revenues or profits, both of which are not a primary concern of the
public sector organizations.
In addition, while it may be possible to measure outputs or quality
of individual government services with such indicators as crime rate
(public safety) or dropout rate (education), to the best of our knowl-
edge, the literature in public economics or public administration does
not offer a single quantitative measure, similar to sales or value-added,
that accounts for diverse state government outputs such as transporta-
tion or public welfare, each of which has widely different characteristics
from each other. Given our interest to examine the impact of IT invest-
ments and governance on overall government performance, we posit
276 M.-S. Pang / Decision Support Systems 59 (2014) 274–285
here that cost efficiency is a key performance measure that state
governments aim to improve.
The literature and anecdotal evidence point out that IT can be an
effective means for governments to improve cost efficiency by automat-
ing and streamlining manual, laborious business processes. Pandey and
Bretchneider [58] and Moon and Bretchneider [46] show that inefficien-
cy is a primary motivation for governments to adopt and invest more in
IT. For example, in 2005, the State of Arizona developed the Arizona 2-1-
1 Online (http://www.az211.gov) to offer comprehensive, statewide in-
formation on health services and emergency operations to state citizens
[50], so that the citizens can easily access the information and deal with
urgent matters. The state reports that the immediate return on this
investment is substantial. The development and five-year maintenance
costs are approximately $1 million [52], while annual savings in operat-
ing costs of the 911 centers exceed $1.37 million [52]. Many state
governments widely utilize decision support systems (DSS) equipped
with business intelligence capabilities in public welfare programs such
as Medicaid or food banks [51,54]. Such DSS based on data warehouses
and analytic capabilities are used to streamline benefit application
processes, to determine the eligibility of benefit provision in a speedy
manner, and to detect fraudulent benefit claims. It is reported that
these systems help the states save a substantial amount of operating
costs in salaries and expenses that the states otherwise would incur
with outdated, paper-based processes.
2.3. Bureaucracy in IT management
The studies on IT management report that bureaucracy in IT organi-
zations does exist in many forms. For example, IT managers may stick to
an obsolete, inflexible IT infrastructure that is costly to maintain. They
may have vested relationships with certain vendors and offer them a
special treatment in IT procurement processes. It may take several
months or years for them to make a critical decision in IT investment
and deployment because of hierarchical organizational structures and
complex reporting processes. Incompetent, underperforming IT staff
may not be disciplined or replaced at the right time [29]. IT managers
may refuse or fail to accommodate evolving needs of business managers
and customers. Mark and Rau [36] state that “Business units can become
frustrated by long delays in the deployment of needed capabilities, and
IT may be viewed as an unresponsive bureaucracy, a black hole for busi-
ness requests” (p. 23). Bureaucracy may lead to a failure in managing a
large-scale system development project, resulting in escalated develop-
ment costs and long delays [55].
Bureaucracy in IT management may take place in the business side
of an organization as well. For example, uncoordinated IT investments
and deployment are made by business units without close alignment
with enterprise architectures or long-term strategies. Business man-
agers may spend IT budgets in duplicate or incompatible systems,
which do not contribute to organization-wide synergies [69]. A partner-
ship between IT and business functions, which is intended to curb
bureaucracy in the IT function, can be a different manifestation of
bureaucracy [16]. Lohmeyer et al. [34] state that “Partnership between
IT and business … can become too complicated when technology com-
mittees proliferate and lengthy business plans accompany each IT
request. …With decision making so fragmented, few concrete decisions
were reached and finger-pointing was rampant” (p. 41). Our premise in
this study is that involvement and supervision of political principals in
IT governance is an effective way to restrain such IT management
bureaucracy in the public sector organizations.
To the best of our knowledge, there has been little research in IT
management bureaucracy in the public sector organizations. However,
anecdotal evidence suggests that it does exist in government agencies
as well. For example, it has been reported that the recent failure in the
rollout of the U.S. federal healthcare exchange (healthcare.gov) was
attributed to poor project management, last-minute changes in require-
ments, and failure in anticipating the number of users in the site [70].
The integration project between the systems in the U.S. Department of
Defense and Department of Veterans' Affairs for seamless sharing of
disabled veterans' information had experienced a long delay and con-
siderable budget overrun, because of failure in upgrading the outdated
systems and insufficient coordination between the two departments
[44]. Similar IT management bureaucracy was reported in state
governments as well [25].
2.4. Hypotheses
The theory of political controls on bureaucracy asserts that it is a
responsibility of elected representatives to curb bureaucracy and to con-
trol agencies' decision makings and activities, so that policies and public
services fulfill the needs and desires of citizens, not of bureaucrats
[11,38,45,75]. Specifically, by bureaucracy, it refers to a moral-hazard
situation in which unelected bureaucrats (agents) seek to pursue their
own self-interests that conflict with preferences of politicians and
their constituencies (principals). This occurs because of information
asymmetry, where the principals do not have perfect information
on the agents' behavior and decisions, since the principals do not pos-
sess complete knowledge and expertise in policy implementation.
According to this literature, there are three major mechanisms with
which politicians control bureaucrats — (i) monitoring and oversight,
(ii) statutory controls, and (iii) approval of nomination of agency
executives.
The legislature can exercise controls by directly monitoring and
overseeing executive agencies on an ongoing basis. Usually, monitoring
and oversight are conducted by a legislative committee focusing on spe-
cific policy and service areas such as education or transportation. The
committee can carry out such activities as performance evaluation, bud-
get analysis and approval, formal hearings, issuing policy guidelines,
and carrying out a sanction or a punishment in case of a misconduct
or violation [40]. These supervising activities aim to make sure that
the decisions and activities of executive agencies are congruent with
the goals and priorities put forth by the legislature and to detect and
correct any incompliance from the legislative purposes and guidelines.
As of 2004, legislatures in 37 states have IT-related committees that
oversee state IT management [49]. The state legislature records reveal
that such IT-related legislative committees can be an effective
mechanism to exert controls over IT management and operations. For
example, the Kansas Legislature Joint Committee on Information
Technology, which is intended to review IT strategic plans, IT budgets,
and the state enterprise IT architecture,1 recommended in 2008 the
standardization of technology use and existing standards in Kansas hos-
pitals (Page 4-1). It also requested that “all agencies will be expected to
participate in the new statewide Financial Management System (FMS).
Without full participation, multiple agencies will continue to incur sub-
stantial, unnecessary costs” (Page 4-1). This demonstrates that the
Kansas Legislature requests utilization of IT to improve the quality and
efficiency of public health and financial management and demands
the establishment of a standard in technology use and communication
across the state agencies to prevent wasteful spending in incompatible,
silo systems. The Oregon Statutes Chapter 171 stipulates that the duties
of Joint Legislative Committee on Information Management and Tech-
nology include establishing “statewide goals and policy regarding” IT
and making “recommendations regarding established or proposed in-
formation resource management programs and information technology
acquisitions.”2 It further mandates that the enterprise management in IT
“implement a state government-wide approach for managing distribut-
ed information technology assets to minimize total ownership costs …
while realizing maximum benefits for transacting the states business
and delivering services to its citizens.”3
1
http://skyways.lib.ks.us/ksleg/KLRD/2008CommRepts/jcit-cr.pdf (accessed on May. 9,
2011).
2
http://www.oregonlaws.org/ors/171.855 (accessed on Jun. 25, 2012).
3
http://www.oregonlaws.org/ors/184.477 (accessed on Jun. 25, 2012).
 M.-S. Pang / Decision Support Systems 59 (2014) 274–285
We argue that efficiency returns from IT spending are greater in
states whose legislatures have an IT-specific legislative committee
than in others. It is not necessarily the case that state legislatures with-
out an IT committee do not play a controlling role for state IT functions.
However, the political control theory points out that oversight and
monitoring are a challenging task for politicians. It is particularly the
case in IT management, where information asymmetry between
politicians and managers is more severe. Thus, if state IT management
is overseen by a non-IT-specific committee such as government opera-
tion or economic development, the committee members, with limited
time, information, and expertise, would not be able to exert as much
control over IT management as they would be if they are in a committee
exclusively devoted to IT management. This leads us to propose the
following hypothesis.
Hypothesis 1. All others being equal, the association between IT spending
and cost efficiency is stronger in states whose legislature has an IT-related
legislative committee than in ones without such a committee.
Another instrument for political controls is a statutory control [6] or
an administrative procedure [38], in which politicians use legislation to
stipulate rules and procedures that public officials are mandated to
follow in policy making and implementation. In effect, it takes a form
of behavioral control on bureaucrats [20]. As mentioned above, direct
oversight and monitoring is expensive and imperfect for elected politi-
cians because of information asymmetry and their limited resources.
Thus, instead of costly intervention, the legislature uses statutory
controls to dictate with what specific steps the agencies must take in
fulfilling legislative goals and directions. Bawn [6] explains that statuto-
ry controls specify “how the agency is organized, how the agency will
make the policy choice, who participates in agency decisions, what
information is used, and what qualifications are required for key
personnel” (p. 62).
We argue here that establishing the position and duties of a CIO is a
form of statutory control against a chief executive (governor) and senior
managers in executive agencies and propose that efficiency returns to IT
spending are greater when the position and duties of CIO are formally
established by legislation than otherwise. By codifying the role and
responsibilities of CIO for statewide IT management and investments,
the legislature constrains the discretion of other non-IT agency execu-
tives, who might otherwise procure and deploy IT resources in an
uncoordinated manner without taking an enterprise perspective and a
long-term strategic goal into account.
As of 2004, 34 states establish the CIO positions by legislation, while
nine use an executive order to formalize the position. For example, the
Iowa Code Chapter 8A specifies the duties of the Director of Information
Technology Services including “prescribe and adopt information tech-
nology standards and rules” and “develop and recommend legislative
proposals deemed necessary for the continued efficiency of the depart-
ment in performing information technology functions.” The Minnesota
Statutes Chapter 16E charges the state CIO to approve IT development
projects in state agencies and to develop cost-effective IT infrastructure
and services to be shared across the state agencies. The CIO of North
Carolina is also empowered by the General Statutes Chapter 147 to
suspend any IT project in executive agencies that does not conform to
the quality standard and enterprise architecture.
All of this legislation above codifies that the state CIO take greater
responsibilities in statewide IT management vis-à-vis other senior
executives. This enables the CIO to control IT resources across the
organization and to formulate IT-related policies and principles for
the entire business functions to follow. The CIO will be a leader
and a facilitator in the efforts to achieve statewide efficiency
improvement with IT resources. With support and legitimacy con-
ferred by legislation, he or she will be able to effectively coordinate
statewide IT operations and facilitate a standardized IT architecture.
This will lead to greater inter-organizational synergies [69] from IT
277
resources across business units in multi-business organizations
such as state governments.
The CIO position and duties can be instituted by an executive order
as well. For instance, the Michigan Executive Order 2001-3 creates the
Department of Information Technology, which is headed by the state
CIO. Mayer [37] defines an executive order as “a presidential directive
that requires or authorizes some action within the executive branch”
(p. 445). It has been used by the U.S. presidents to establish policy and
to set up and alter administrative and regulatory processes [37]. Like
presidents, governors in U.S. states also have an authority to issue
executive orders and generally are not required to seek an action or
approval of state legislatures in doing so. Nonetheless, even though
executive orders carry an equal legal weight with legislation,4 their
impact and authority is more transient and provisional than legislation.
An executive order can be revoked by succeeding governors without
legislative consent, and Mayer [37] demonstrates that they are issued
more frequently in the absence of public support.
To be in charge of statewide IT management, the state CIO needs
sufficient authority and power granted by the legislative branch. It is a
prerequisite to overcome resistance from business units which had
had discretion in managing their own IT resources and investments.
Legislative establishment of the CIO position, a type of statutory control
on agency executives, offers such authority and power to the CIO. Thus,
we hypothesize the moderating role of legislative establishment of CIO
position as follows.
Hypothesis 2. All others being equal, the association between IT spending
and cost efficiency is stronger in states whose CIO position is established by
legislation than otherwise.
A legislative branch controls bureaucracy by appointing agency
executives [11,75]. Although it does not directly appoint an executive,
it may have an authority to approve appointment made by a chief exec-
utive. This approval authority of the legislature discourages the chief ex-
ecutive from nominating an appointee who is not likely to be approved
by the legislature. In this way, the elected lawmakers are able to choose
a nominee who is expected to be more capable of fulfilling their policy
preferences, and more importantly, they can select those who are not
likely to pursue their self-interests. Wood and Waterman's [75] empir-
ical investigation shows that appointment approval is a more effective
instrument of political control than others such as direct oversight and
statutory controls.
Based on the principal–agent model, Calvert et al. [11] set up a nom-
ination game between a chief executive and a legislature, the latter of
which has a veto power for an appointee. According to their model, in
equilibrium, there exists a pool of appointees whose preferences are
not too far from the preference of the legislature. It is mutually benefi-
cial for both the chief executive and the legislature to appoint and
approve one from the pool, respectively. In the absence of the veto
power, the chief executive would appoint a nominee whose preference
is closer to his than to the legislature's. This model suggests that if the
legislature is to approve a CIO nominee, he or she is likely to better rep-
resent its interests in regard to the state's strategic goals and directions
than the one who is unilaterally appointed by the governor. Meanwhile,
the appointing authority functions as a latent control as well [11], in
which mid-level agency managers, who themselves are in the pool of
perspective appointees, voluntarily avoid to deviate from the prefer-
ences of the legislature in their actions and decision makings.
As of 2004, appointment of a state CIO requires legislative approval
in 19 states. As the political control theory predicts, state CIOs and IT
managers are more likely to pursue the goal of legislatures in efficiency
improvement in IT management without bureaucracy when the CIO
appointment is approved by state legislatures than otherwise. This
leads us to offer the following hypothesis.
4
http://www.thisnation.com/question/040.html (accessed on Jul. 11, 2011).
278 M.-S. Pang / Decision Support Systems 59 (2014) 274–285

Table 1
Data sources.

Source Data Variable

National Association of State CIOs
U.S. Census Bureau
State governments' Web sites
Bureau of Economic Accounts
National Conference of State Legislature
State Higher Education Executive Officers
Centers for Medicare & Medicaid Services
Federal Highway Administration
Bureau of Justice Statistics
Compendium of Digital Governments in the States (2002, 2005) IT budget (IT1 and IT2) and IT governance
State Government Finances Operation expense (C), Capital price (w2), Federal grant (z4)
State Government Employment & Payroll Labor price (w1)
State Annual Population Estimate Population (z1)
State Household Income Household income (z2)
Comprehensive Annual Financial Reports (CAFR) Capital depreciation (C)
Alternative capital price (w2)
State Gross Domestic Product (GDP) GDP (z3)
Price Indexes for GDP
State legislature and gubernatorial election results Governor (z5), Legislature (z6)
State Higher Education Finance Survey Education (Y1)
National Health Expenditure Data by State of Resident Public Welfare (Y2)
Annual Highway Statistics Transportation (Y3)
National Prisoner Statistics Public Safety (Y4)

Hypothesis 3. All others being equal, the association between IT spending
and cost efficiency is stronger in states whose legislature approves a state
CIO nominee than otherwise.
3. Empirical methodology
3.1. The two-stage estimation approach
The estimation approach is based on Pang [59]. We estimate the re-
lationship between IT investments and cost efficiency and the moderat-
ing effect of IT governance with a two-stage estimation approach based
on a multi-product translog cost function [12,13]. Several studies in
public economics have used this method to measure government
efficiency [18,23,76]. For example, Geys [23] measures the cost efficien-
cy of 304 Flemish local governments with a cost function model.
Worthington [76] also adopts a similar two-stage approach to explain
the cause of inefficiency in Australian local governments.
The two-stage approach proceeds as follows. In the first stage, we es-
timate cost efficiency of each state-year observation with a stochastic
frontier model [1,40]. In the second stage, we regress the estimated cost
efficiency on IT spending and governance measures and control variables.
Our key interest in measurement is technical cost efficiency. Formal-
ly, Koopmans [30] defines a producer as being technically efficient if and
only if it cannot increase production of an output without increasing any
input or decreasing any other outputs. Kumbhakar and Lovell [32] de-
fine a cost frontier as the least amount of inputs that can produce the
given amount of outputs. Technical cost inefficiency is measured as
the ratio of actual cost to the cost frontier. We estimate this technical
cost inefficiency with a stochastic frontier model in the first stage.
A multi-product translog cost function with n outputs and m input
prices is given by
X
n
1X n Xn Xm
lnC k;t ¼ α0 þ αi lnY i;k;t þ αij lnY i;k;t lnY j;k;t þ
2
i¼1 i¼1 j¼1 i¼1
1X m X m Xm X n
þ β lnwi;k;t lnw j;k;t þ γij lnwi;k;t lnY j;k;t þ εk;t
2 i¼1 j¼1 ij i¼1 j¼1
given. This is the case in our context because state government produc-
tion is regulated by various federal and state laws, and it generally takes
considerable time to amend such laws. Thus, compared to private-
sector firms, governments cannot easily adjust the amount of outputs
in response to changes in demands or input prices. In this regard, it is
appropriate to assume that outputs (Yi,k,t) are exogenous, as in Eq. (1).
The stochastic frontier model assumes a frontier to be stochastic, as
even the maximum production level may be influenced by various
unobserved factors, random shocks, or statistical noises. Following this
rationale, Aigner et al. [1] and Meeusen and van den Broeck [41] assume
that a residual εk,t in Eq. (1) is given by εk,t = vk,t + uk,t. Here, vk,t repre-
sents a random error and is assumed to follow a normal distribution of
N(0,σ2v ). uk,t refers to an inefficiency factor, which by definition is greater
than or equal to zero, and is assumed to follow a half-normal distribu-
tion truncated below zero. The coefficients in Eq. (1) and the standard
deviation of the two error terms (vk,t and uk,t) are estimated using
maximum likelihood estimation.6 Technical cost inefficiency (the ratio
of the actual cost to the cost frontier) is given by exp(uk,t). We use an
unbiased estimator for exp(uk,t) proposed by Battese and Coelli [4] to
obtain technical inefficiency Ineffk,t, of each state-year observation.
For ease of interpretation, we reverse Ineff k,t by taking Eff k,t =
2 − Ineffk,t as the dependent variable for the second stage estimation.
This estimated technical efficiency (Effk,t) is regressed on IT spending
(IT), IT governance (g), and control variables (z) as shown in Eq. (2).
In addition, the interaction terms of IT spending and governance vari-
ables are included to test our hypotheses.
Ef f k;t ¼ δ0 X
þ δIT IT k;t−2 X X
þ δgi g i;k;t−2 þ δITgi g i;k;t−2  IT k;t−2 þ δzi zi;k;t þ ξk;t : ð2Þ
Following the notion in the IT value literature that it takes time for IT
value to materialize [10], we use two-year lagged IT spending (ITk,t − 2)
and governance (gi,k,t − 2) variables.7 Since the hypotheses are tested
βi lnwi;k;t with a cross-sectional panel dataset and there may be unobserved
heterogeneity in state government production, we estimate Eq. (2)
with a fixed-effects estimation model with Driscoll and Kraay standard
errors [19], which account for interstate correlation in residuals.
ð1Þ
3.2. Measures and data sources

where k and t are subscripts for state and year, respectively. Ck,t is the
total cost that state k incurs at year t, Yi,k,t are the amount of outputs,
and wi,k,t are the input prices. Following Caves et al. [12], we impose con-
straints for homogeneity of degree one in price on Eq. (1).5
The use of a cost function in modeling state government production
is warranted as it implicitly assumes that outputs are exogenously
5 7
This ensures that when all input prices wi are multiplied by x, the total cost C is
multiplied by x as well.
Our first stage estimation with the cost function (Eq. (1)) adopts two
input measures (m = 2) and four output measures (n = 4). First, a
total cost (C) is measured by the sum of per capita operation expenses
and capital depreciation (buildings and equipments). Operation
expenses are obtained from the U.S. Annual State Government Finances
6
More details in the estimation process are available in Aigner et al. [1].
We re-estimated Eq. (2) with different lag lengths (from 0 to 4 years) and did not
obtain qualitatively different results.
 M.-S. Pang / Decision Support Systems 59 (2014) 274–285
Table 2
States in the second-stage estimation.
Geographic region and division are from the 2000 U.S. Census.
Region Division
Northeast (1) New England
(2) Mid-Atlantic
Midwest (3) East North Central
(4) West North Central
South (5) South Atlantic
(6) East South Central
(7) West South Central
West (8) Mountain
(9) Pacific
The number in parentheses next to a state is the number of years that the state appears in the second-stage estimation.
reports published by the U.S. Census Bureau. Capital depreciation
figures are acquired from the Comprehensive Annual Financial Reports
posted at states' Web sites (Table 1). Capital depreciation is reported
from fiscal-year 2001 to 2009, and some states do not post all nine-
year reports at their Web sites, limiting our sample size to 428 state-
years (Table 2). All dollar terms are adjusted for 2005 dollar.
For output measures, we choose the four most representative public
services that state governments supply — education, public welfare,
transportation, and public safety.8 Following prior studies in public eco-
nomics, we selected four proxy variables to measure the four outputs as
shown in Table 3. We also selected two input price measures in the cost
function estimation — capital and labor (Table 3). The correlations
among the variables in the first-stage estimation are presented in
Table 4.
The measures in the second-stage estimation (Eq. (2)) are shown in
Table 5. IT spending, our key independent variable, is measured in two
ways — per capita IT budget of central IT offices (IT1) and the ratio of
IT budget to total general expenditures (IT2). These figures were obtain-
ed from the NASCIO Compendium of Digital Governments in States pub-
lished in 2003 and 2005 [49]. This publication reports IT budgets
(central IT offices and executive branches) in more than 40 states
from the fiscal year 2001 to 2005. However, there are many missing
values in executive branch IT budget data.9 Thus, we use the IT budget
of central IT offices for our IT budget measures. The IT budget figures
are available in 193 state-years between 2001 and 2005, but combining
them with the sample in the first-stage estimation left us 188 state-year
observations. In addition, we had to drop three observations of
Delaware, which reports an unusually large amount of per capita IT
spending (greater than 6σ). Hence, our sample size in the second
stage becomes 185. t-tests indicate that with respect to population,
GDP, and total state expenditures, the states in our sample do not differ
significantly from those that are not in the sample.
Data on the three IT governance variables – Committee (H1), Estab-
lish (H2), and Appoint (H3) – were also obtained from the Compendium
(Table 5). Committee is a dummy variable whose value is one if there is
an IT-specific legislative committee in either state senate, house of rep-
resentatives, or both. Establish is measured by one if a CIO position is
established by legislation. It is also equal to one in five states where
the CIO position is established by both legislation and an executive
order. Approve is equal to one if a state senate approves the nomination
of a state CIO. Hypotheses 1, 2, and 3 will be supported if the coefficients
of IT × Committee, IT × Establish, and IT × Approve are positive and
significant, respectively.
8
According to the U.S. Census Bureau, the four service areas occupy as much as 65% of
the total state general expenditures in the fiscal year 2008.
9
Executive branch IT budgets are available only for 29 states. Measuring IT spending
with the total IT budget in both a central IT organization and executive branches leaves
us only 92 observations in the second stage estimation, which are too few observations
to obtain statistically significant estimations.
279
States
Maine(4), New Hampshire(5), Vermont(3), Massachusetts(5), Rhode Island(5), Connecticut(3)
New York(5), Pennsylvania(2), New Jersey(3)
Wisconsin(4), Michigan(5), Indiana(3), Ohio(5)
Missouri(5), North Dakota(5), South Dakota(5), Kansas(5), Minnesota(5), Iowa(5)
Maryland(5), Virginia(3), West Virginia(2), North Carolina(5), South Carolina(3), Georgia(4), Florida(2)
Kentucky(5), Tennessee(5), Mississippi(5), Alabama(5)
Oklahoma(2), Texas(5), Arkansas(5)
Idaho(5), Montana(5), Wyoming(3), Nevada(5), Utah(3), Arizona(5), New Mexico(5)
Washington(5), Oregon(3), California(3), Hawaii(5)
The public economics literature provides economic, sociological, and
political factors that affect technical efficiency in government produc-
tion. Davis and Hayes [17] and Grossman et al. [26] suggest that the
size of jurisdiction (population) affects government efficiency. Geys
[23] and De Borger and Kerstens [18] argue that per capita income
level is related to efficiency as well. Following these studies, we include
population, median household income, and per capita state GDP as con-
trol variables in the second-stage estimation (Eq. (2)). The fiscal illusion
hypothesis [23,26] suggests that a large influx of external revenues from
a higher level of governments is a source of inefficiency. Hence, we also
control for per capita inter-government grants from the federal govern-
ment to each state in Eq. (2). We also include Garand's [22] political in-
dicators – a governor's party affiliation and party control of legislatures
– because they represent important political and institutional factors
that may affect state government efficiency. Eq. (2) also includes other
IT governance indicators – centrality of IT management, reporting rela-
tionship of a CIO, and the size of central IT functions – as control vari-
ables. Lastly, we include year dummies in our second-stage estimation
to account for nation-wide changes in economic and political trends.
Tables 5 and 6 show the summary statistics and correlations in the
second-stage estimation, respectively.
4. Results
Table 7 shows the result of the first-stage stochastic frontier estima-
tion. Here, the variance of inefficiency term (u) is positive and statisti-
cally significant, indicating possible presence of inefficiency in state
government production. The estimated cost inefficiency (the ratio of ac-
tual costs to the cost frontier) ranges between 1.0165 and 1.9844.10 This
indicates that the most efficient and inefficient states spend 1.65% and
98.44% more in operational expenses and capital depreciation than the
minimum possible costs, respectively.
The second-stage estimation results are presented in Table 8. In
Columns (2) and (5), the coefficients of IT spending (IT1 and IT2) are
positive and statistically significant. This shows that the more a state
government spends in IT, the more efficient it becomes. In both
Columns (3) and (6), we add the three interaction terms. The
coefficients of IT1 × Establish and IT1 × Approve (Column 3) are posi-
tive and significant at the 1%-level of significance, supporting
Hypotheses 2 and 3, respectively. This is the case with IT2 × Establish
and IT2 × Approve (Column 6), showing that this result is robust to
the use of different denominators for normalization. It suggests that
when a state legislature establishes a CIO position by legislation or
approves a CIO appointee, the impact of IT budget on cost efficiency
becomes stronger.
Surprisingly, the coefficients of IT1 × Committee and IT2 ×
Committee (Columns 3 and 6, respectively) are negative and significant,
10
Eff (the dependent variable in the second stage estimation) is obtained by
Eff = 2 − Inefficiency. Thus, as in Table 5, Eff ranges from 0.0156(= 2–1.9844) to
0.9835(= 2–0.0165).
280 M.-S. Pang / Decision Support Systems 59 (2014) 274–285

Table 3
Variable definition and summary statistics for the first-stage estimation.

Variables N Avg. Std. dev. Min. Max.

Cost (C) 428 2901.758 1036.556 1565.577 8842.813

The sum of per capita annual current operation expense and capital depreciation (building and equipments)
Education (Y1) 428 33576.33 6776.81 17778.46 57650.29
The number of enrolled students in public postsecondary educational institutions per thousand population
Public Welfare (Y2) 428 141.0861 42.92587 55.55066 251.1516
The number of Medicaid recipients per million population [18]
Transportation (Y3) 428 4152.837 3765.729 266.9315 18963.43
The length (mile) of state-maintained highways and roads per million population [76]
Public safety (Y4) 428 4332.148 1691.575 281.1109 8811.179
The number of inmates in state correctional facilities per million population
Labor price (w1) 428 3684.533 524.7327 2918.602 5231.4
The monthly total payroll ($) divided by the number of fulltime-equivalent employees [17,76]
Capital price (w2) 428 4.962733 0.891754 3.0647 8.7823
The annual interest payments divided by mean debt level (average of beginning-of-fiscal-year debt and end-of-fiscal-year debt) [17,76]

Fiscal year 2001–2008; annual capital depreciation (part of C) is missing at 22 state-year observations.

rejecting Hypothesis 1. This means that when state legislatures have an two governance controls is zero (Point [01] or [10]). It is interesting
IT-related committee, efficiency returns from IT investments diminish. to see that in Fig. 1-(a), the expected cost savings from IT when
One possible explanation for this is that the IT-specific legislative com- Approve = Committee = 1 (Point [11], $9.16) are similar to the case
mittee may create another layer of bureaucracy in IT governance. The of Approve = Committee = 0 (Point [00], $9.93). In Fig. 1-(b), the
actions and processes of the committee such as legislative hearings expected cost savings with Approve = Committee = 1 (Point [11],
and formal evaluation may hinder effective, timely IT investment and $8.28) are higher than with Approve = Committee = 1 (Point [00],
deployment. Elected representatives in such a committee may not pos- $7.03). However, in both Fig. 1-(a) and (b), the 95% confidence internals
sess sufficient knowledge and information to supervise state IT are narrower at Point [11] than at Point [00].
management. We have several explanations for this finding. First, as we mention
In order to better explain this counterintuitive finding, we add the above, in comparison between Points [00] and [01] in Fig. 1-(a) and
three-way interaction term of IT × Committee × Approve to the (b), the presence of a legislative committee on IT management may
model. As shown in Columns (4) and (7) of Table 8, the coefficients of exacerbate complexity in IT management. Second, in comparison be-
this three-way interaction term are found to be positive and signifi- tween Points [00] and [10], it appears that the approval of CIO
cant.11 In both Columns (4) and (7), the coefficients of IT1 × Approve appointment by elected lawmakers weaken returns from IT spending
and IT2 × Approve become insignificant. This suggests that the positive slightly, as shown by the negative but statistically insignificant coeffi-
moderating effect of legislative approval for CIO (H3) disappears if the cients of IT × Approve in Columns (4) and (7). It may be because
legislature does not have a legislative committee devoted to IT manage- most elected representatives do not possess sufficient expertise in IT
ment (Committee = 0). Likewise, in Column (4), the coefficient of management. A way to overcome these adverse effects is for them
IT1 × Committee is 0.0015(=0.0048–0.0033) if Approve is equal to 1, both to engage in a CIO selection and to oversee IT management via a
but it becomes −0.0033 if Approve is 0. This is the case in Column (7) legislative committee at the same time. For approval of CIO nomination
as well. Hence, the presence of an IT-specific legislative committee to be effective, there must be a group of lawmakers dedicated to over-
strengthens the relationship between IT spending and cost efficiency seeing IT management. Lastly, it can be shown that when Establish is
only if the lawmakers approve a CIO appointment. 0, the expected cost savings are less than $1, regardless of the values
To illustrate the effect of IT spending and IT governance on cost of Approve and Committee, suggesting that formalizing the CIO position
efficiency, we calculated an average cost reduction from a $1 in- by legislation is a key prerequisite to the positive impact of IT spending
crease in IT budget as follows. First, the cost frontier (the minimum on state cost efficiency.
possible costs) of each observation is calculated by dividing the ac-
tual costs by the estimated technical inefficiency. For instance, if an 5. Discussions and conclusion
actual per capita cost is $3000 and the estimated cost inefficiency
(the ratio of actual cost to the cost frontier) is 1.5, the cost frontier It has been reported that due to severe fiscal crises for the last several
for this state is $3000 / 1.5 = $2000. By averaging this cost frontier years, IT investments in many governments became an early target of
for all state-year observations, we obtained $2545.33. When all of budgetary cuts in an attempt to close the budget gaps. For example,
Approve, Committee, and Establish are equal to 1, the sum of the the NASCIO 2010 State CIO Survey reports that 64% of the state CIOs ex-
coefficients of IT1 and all interactions terms from Table 8, Column pect reduction in IT budget [53]. In 2011, the State of Washington cut
(4) is (− 0.0001 + 0.0040 − 0.0018 − 0.0033 + 0.0048) = 0.0036, the size of personnel in the Department of Information Services by
meaning that a one dollar increase in per capita IT spending reduces more than 10% [24]. Given this fiscal environment, elected officials
cost inefficiency by 0.0036. Thus, in a state with the average cost frontier and public sector managers will ask how declining IT budgets should
($2545.33), reduction in per capita cost from a $1 increase in per capita IT
spending amounts to $2545.33 × 0.0036 = $9.16, as shown in Fig. 1-(a). Table 4
Fig. 1-(b) is obtained from Table 8, Column (7) in a similar manner. Correlation table for the first-stage estimation.
Fig. 1-(a) and (b) illustrate the average cost reduction in each case
C Y1 Y2 Y3 Y4 w2
with 95% confidence intervals when Establish is equal to one. This
shows that average cost savings are higher when both Approve and Y1 −0.1413
Y2 0.1856 0.0566
Committee are equal to one (Point [11]) than when only one of these Y3 0.2122 0.3592 0.0023
Y4 0.1163 0.0682 0.2186 0.0167
11
w1 0.1862 −0.3096 −0.0720 −0.5308 −0.1816
We also tried to add other three-way interaction terms (IT × Establish × Approve and
w2 0.1568 −0.0781 −0.0820 −0.0857 0.0237 −0.0198
IT × Committee × Establish), which were estimated to be insignificant.
 M.-S. Pang / Decision Support Systems 59 (2014) 274–285 281

Table 5
Variable definition and summary statistics for the second-stage estimation.

Variables N Avg. Std. dev. Min. Max.

Technical efficiency (Eff) 185 0.8485 0.1677 0.0156 0.9835

2 − (the ratio of actual cost to the cost in the frontier)
Population (z1) 185 5.8545 6.2962 0.5065 35.9903
Annual state population estimate (in millions)
Household income (z2) 185 46.4493 7.1465 32.6138 65.7097
State median household income (in thousand dollar)
GDP (z3) 185 39.2285 6.2065 26.7714 57.0583
Per capita state annual gross domestic product (in thousand dollar)
Federal grant (z4) 185 1.4170 0.4356 0.6854 3.6973
Per capita annual intergovernmental revenues from the federal government (in thousand dollar)
Governor (z5) 185 0.5405 0.4997 0 1
1 if governor is Republican, 0 otherwise
Legislature (z6) 185 0.9837 0.3195 0.2438 1.6143
The sum of the proportion of Republican lawmakers in state senate and that of state house of representatives
Centrality (z7) 185 5.5676 3.1514 0 13
The number of IT management areas that a state CIO is directly in charge of statewide
Reporting (z8) 185 0.5297 0.5005 0 1
1 if the state CIO directly reports to the governor, 0 otherwise
ITEmp (z9) 185 0.4578 0.4591 0.0016 2.2331
The ratio of central IT organizational personnel to total state personnel (%)
IT1 185 19.8044 17.5104 0.0411 89.2275
Per capita central IT office budget (in dollar)
IT2 185 0.5023 0.4564 0.0014 2.5388
The ratio of a central IT office budget to total general expenditure (%)
Committee (g1) 185 0.6649 0.4733 0 1
1 if either state senate, house of representative or both has an IT-specific legislative committee, 0 otherwise
Establish (g2) 185 0.8162 0.3884 0 1
1 if a state CIO position is established by legislation, 0 otherwise
Approve (g3) 185 0.3405 0.4752 0 1
1 if a state senate approves nomination of a state CIO, 0 otherwise

Fiscal year 2003–2007 with a two-year lag of IT budget and governance (2001–2005).

be managed and used more judiciously for the governments' attempt to
overcome the fiscal stress. This paper seeks to provide an answer to this
question.
We draw upon the theory of political control on bureaucracy to
articulate the role of elected lawmakers in IT governance and to hy-
pothesize the moderating effects of three legislative controls to IT
management on the cost-efficiency returns from IT expenditures.
Our theoretical reasoning proposes that by exerting controls over
bureaucracy in IT management, politicians can ensure that IT man-
agement and investments accomplish the required purposes more
effectively, one of which is to provide public services for citizens
with as limited resources as possible, i.e. enhancing cost efficiency.
Our empirical analyses demonstrate that IT spending in U.S. state
governments positively affects cost efficiency in state governments.
We further find that this relationship between IT and cost efficiency is
greater when the CIO position and duties are formalized by legislation.
Indeed, among our three indicators for IT governance, the legislative
establishment demonstrates the strongest moderating effect (Table 8).
Furthermore, we find that supervision of state legislatures on IT man-
agement and approval of a CIO appointee complement each other. The
impact of IT expenditures on state efficiency is greater when the state
legislature both has an IT-specific legislative committee and approves
nomination of a state CIO than when it plays only one of the two roles
(Fig. 1).
Our study carries some limitations. First, it bears the weaknesses of
stochastic frontier estimation and two-stage estimation approach
[32,35,57], such as inconsistency of technical inefficiency estimators or
possible biases from functional misspecification. However, despite these
shortcomings, we believe that this approach is one of the most feasible
ways to estimate the relationship between IT investments and govern-
ment performance. Second, due to data limitation, we could use only IT
budget data of central IT organizations, as the NASCIO Compendium does
not report the entire IT budget across state agencies and departments in
many states. But we still believe that our IT budget measure reflects the

Table 6
Correlation table for the second-stage estimation.

Eff z1 z2 z3 z4 z5 z6 z7 z8 z9 IT1 IT2 g1 g2

z1 0.2138
z2 −0.2194 0.0765
z3 −0.0037 0.2811 0.6479
z4 −0.1726 −0.1839 −0.3602 −0.0614
z5 −0.1184 0.0063 0.1262 0.0496 −0.0100
z6 0.3946 0.0139 −0.1652 −0.1481 −0.0506 −0.1092
z7 0.1055 0.1358 0.1824 0.1787 −0.1234 0.0215 0.0204
z8 0.2437 0.3190 −0.1883 −0.0023 −0.1570 −0.0429 0.1902 0.3218
z9 0.1893 −0.2895 0.0472 0.0168 −0.0595 0.0467 0.1813 0.3301 0.0951
IT1 0.1942 −0.2595 −0.1515 0.0097 0.1859 0.1350 0.2273 0.0432 0.1237 0.5117
IT2 0.2277 −0.2025 −0.1586 −0.0222 0.0400 0.1134 0.2453 0.0371 0.1835 0.4964 0.9594
g1 0.2085 −0.0029 0.0018 0.0261 −0.0756 −0.2639 0.0410 0.2120 0.2258 −0.0035 −0.0663 −0.1094
g2 0.1713 −0.1738 −0.0724 −0.0430 0.0364 −0.0174 −0.0152 −0.0475 0.0562 0.0791 −0.0461 −0.0394 0.2840
g3 0.0765 −0.0561 −0.0629 −0.1733 0.0456 0.0674 0.0127 0.2985 0.2429 0.0324 −0.0629 −0.0993 0.1236 0.1054
282 M.-S. Pang / Decision Support Systems 59 (2014) 274–285

Table 7
The first-stage stochastic cost frontier estimation results.

Stochastic frontier estimation (dependent variable: log C)

Model w/o interaction terms Model with interaction terms

(1) (2) (3)

ln Y1 0.2883⁎⁎⁎ ln Y1 29.6629⁎⁎⁎ ln w1 −1.6574⁎

(0.0478) (4.4878) (1.0035)
ln Y2 0.2556⁎⁎⁎ ln Y2 −6.2116⁎⁎ ln w2 2.6574⁎⁎⁎
(0.0216) (2.8412) (1.0035)
ln Y3 0.1367⁎⁎⁎ ln Y3 −10.0623⁎⁎⁎ ln w1 ln w1 0.6751⁎⁎⁎
(0.0134) (1.1195) (0.1360)
ln Y4 0.0153 ln Y4 −4.9570⁎⁎ ln w2 ln w2 0.0452
(0.0270) (2.2712) (0.1296)
ln w1 0.6901⁎⁎⁎ ln Y1 ln Y1 −0.2212 ln w1 ln w2 −0.3601⁎⁎⁎
(0.0441) (0.1867) (0.1057)
ln w2 0.3098⁎⁎⁎ ln Y1 ln Y2 −0.6930⁎⁎⁎ ln w1 ln Y1 −2.2131⁎⁎⁎
(0.0441) (0.1336) (0.2951)
Controls Year/geographic divisions ln Y1 ln Y3 −0.1661⁎⁎ ln w1 ln Y2 0.8995⁎⁎⁎
(0.0656) (0.2629)
ln Y1 ln Y4 −0.2156⁎⁎ ln w1 ln Y3 0.8960⁎⁎⁎
(0.1040) (0.1293)
ln Y2 ln Y2 0.1303⁎⁎ ln w1 ln Y4 0.4176⁎⁎
(0.0677) (0.1954)
ln Y2 ln Y3 0.2409⁎⁎⁎ ln w2 ln Y1 −0.1894
(0.0387) (0.1169)
ln Y2 ln Y4 0.4186⁎⁎⁎ ln w2 ln Y2 −0.2236⁎
(0.0628) (0.1270)
ln Y3 ln Y3 0.1449⁎⁎⁎ ln w2 ln Y3 −0.0002
(0.0176) (0.0471)
ln Y3 ln Y4 0.1352⁎⁎⁎ ln w2 ln Y4 0.4133⁎⁎⁎
(0.0294) (0.1065)
ln Y4 ln Y4 0.0013 Controls Year/Geographic divisions
(0.0186)
σva 0.0446⁎⁎⁎ σva 0.0697⁎⁎⁎
(0.0077) (0.0089)
σub 0.2192⁎⁎⁎ σub 0.1171⁎⁎⁎
(0.0135) (0.0123)
ln L 146.2038 ln L 286.8115
Wald χ2 1891.57⁎⁎⁎ Wald χ2 2545.13⁎⁎⁎

N = 428; Standard errors are in parentheses.

⁎ p b 0.1.
⁎⁎ p b 0.05.
⁎⁎⁎ p b 0.01.
a
The variance of idiosyncratic errors (vk,t);
b
The variance of technical inefficiency terms (uk,t, significance from a log-likelihood test).

extent to which state governments perceive IT as strategic resources for
statewide performance improvement. Lastly, we cannot rule out the pos-
sibility that IT spending improves state cost efficiency by compromising
the quality of public services, although we do not expect that this is the
case. Further studies are warranted to examine whether government IT
spending leads to an improvement in public service quality.
This study contributes to the literature on IT business value and IT
governance as follows. First, we expand the scope of IT value research
into the public sector domain. Although the public sector organizations
have adopted IT in almost every aspect of administration as for-profit
firms do, the literature does not illuminate whether IT spending does
contribute to performance improvement in government. Second, we
investigate how involvement of a legislative body in IT governance af-
fects returns to IT spending. To the best of knowledge, the studies in IT
governance to date have paid less attention to the role of “principals” –
board of directors in for-profit firms or legislatures in governments –
whose primary responsibility is to make sure that the activities and
decisions of managers are in accordance with the principals' interests.
For this purpose, we bring the political control theory to theorize the
role of the principals in IT governance and to hypothesize its moderat-
ing effect. We believe that ours is the first to adopt this interdisciplinary
approach marrying the IS and political sciences literature.
This paper also offers several meaningful implications for managers
in the public sector organizations. Whether in the public or the business
sector, there may exist IT bureaucracy; an IT function could be
unresponsive to strategic needs of business units in IT, fall behind
emerging trends in technology, or fail to manage capable employees
and vendors. In a large, multi-divisional organization such as a state
government, IT bureaucracy may hamper coordination and standardi-
zation in IT infrastructures and platforms across business units, which
is instrumental for cross-unit synergies [69]. For instance, effective im-
plementation of a large-scale information systems, such as decision sup-
port systems for public welfare administration that consist of data
warehouses and business analytics tools (Section 2.1), requires state-
wide data collection and integration across state executive agencies,
strong leadership of a state CIO, and cooperation of state agencies, all
of which can hardly be achievable in the presence of IT bureaucracy.
Our findings suggest that for bureaucracy in IT management to be over-
come, the IT function be accompanied with adequate supervision and
guidance from elected representatives. The politicians should play a
key role in IT governance for achieving greater returns to IT by selecting
a right person for a CIO position, by legitimizing the CIO position and
duties, and by monitoring IT operation on an ongoing basis. The caveat,
however, is that involvement of the lawmakers in IT management may
unintentionally create another layer of bureaucracy. Thus, the IT gover-
nance needs to strike the right balance between effective oversight on IT
management and speed investments and deployment in state-of-the-
art IT systems.
We believe that there are numerous research opportunities in IT
governance and management in the public sector organization. First,
 M.-S. Pang / Decision Support Systems 59 (2014) 274–285 283

Table 8
The second-stage estimation results.

Dependent variable — technical efficiency

Method Fixed effects regression with Driscoll–Kraay standard errors

(1) (2) (3) (4) (5) (6) (7)

Population −0.0041 −0.0019 −0.0080 −0.0089 −0.0022 −0.0085 −0.0093

(0.0086) (0.0084) (0.0086) (0.0092) (0.0083) (0.0097) (0.0104)
GDP 0.0013 0.0013 0.0006 0.0008 0.0013 0.0009 0.0009
(0.0023) (0.0022) (0.0024) (0.0026) (0.0022) (0.0022) (0.0024)
Income −0.0016⁎⁎ −0.0014⁎⁎ −0.0019⁎⁎ −0.0022⁎⁎ −0.0014⁎⁎ −0.0018⁎⁎ −0.0020⁎⁎
(0.0007) (0.0007) (0.0008) (0.0008) (0.0007) (0.0008) (0.0009)
Federal grant −0.1573⁎⁎⁎ −0.1559⁎⁎⁎ −0.1680⁎⁎⁎ −0.1694⁎⁎⁎ −0.1569⁎⁎⁎ −0.1690⁎⁎⁎ −0.1711⁎⁎⁎
(0.0192) (0.0195) (0.0205) (0.0204) (0.0195) (0.0189) (0.0187)
Governor 0.0072⁎⁎⁎ 0.0033 0.0039⁎⁎⁎ 0.0023⁎⁎⁎ 0.0036⁎ 0.0046⁎⁎⁎ 0.0030⁎⁎
(0.0020) (0.0022) (0.0013) (0.0013) (0.0019) (0.0012) (0.0014)
Legislature −0.1381⁎⁎⁎ −0.1385⁎⁎⁎ −0.1278⁎⁎⁎ −0.1200⁎⁎⁎ −0.1374⁎⁎⁎ −0.1272⁎⁎⁎ −0.1156⁎⁎⁎
(0.0214) (0.0215) (0.0198) (0.0189) (0.0215) (0.0192) (0.0187)
Centrality 0.0011⁎⁎⁎ 0.0016⁎⁎⁎ 0.0015⁎⁎⁎ 0.0015⁎⁎⁎ 0.0016⁎⁎⁎ 0.0016⁎⁎⁎ 0.0016⁎⁎⁎
(0.0002) (0.0002) (0.0002) (0.0002) (0.0002) (0.0001) (0.0001)
Reporting 0.0021 0.0000 −0.0186⁎⁎ −0.0222⁎⁎⁎ 0.0004 −0.0165⁎⁎ −0.0196⁎⁎
(0.0049) (0.0046) (0.0069) (0.0069) (0.0047) (0.0081) (0.0086)
ITEmp −0.0006 −0.0012⁎⁎ −0.0013⁎⁎ −0.0012 −0.0011⁎⁎ −0.0017⁎⁎⁎ −0.0015⁎⁎
(0.0006) (0.0005) (0.0005) (0.0005) (0.0005) (0.0006) (0.0006)
Establish 0.0350⁎⁎⁎ 0.0346⁎⁎⁎ 0.0070 0.0017 0.0349⁎⁎⁎ 0.0248⁎⁎⁎ 0.0204⁎⁎⁎
(0.0053) (0.0052) (0.0065) (0.0071) (0.0052) (0.0065) (0.0067)
Approve −0.0164⁎⁎⁎ −0.0140⁎⁎ −0.0276⁎⁎⁎ −0.0279⁎⁎⁎ −0.0146⁎⁎ −0.0287⁎⁎⁎ −0.0295⁎⁎⁎
(0.0056) (0.0054) (0.0065) (0.0064) (0.0056) (0.0067) (0.0067)
Committee −0.0460⁎⁎⁎ −0.0426⁎⁎⁎ −0.0176⁎⁎ −0.0181⁎⁎ −0.0425⁎⁎⁎ −0.0238⁎⁎ −0.0219⁎⁎
(0.0051) (0.0055) (0.0087) (0.0084) (0.0054) (0.0112) (0.0104)
IT1a 0.0003⁎⁎⁎ 0.0000 −0.0001
(0.0001) (0.0001) (0.0001)
IT1 × Establish 0.0034⁎⁎⁎ 0.0040⁎⁎⁎
(0.0010) (0.0009)
IT1 × Approve 0.0026⁎⁎⁎ −0.0018
(0.0006) (0.0012)
IT1 × Committee −0.0027⁎⁎⁎ −0.0033⁎⁎⁎
(0.0008) (0.0008)
IT1 × Approve × Committee 0.0048⁎⁎⁎
(0.0010)
IT2b 0.0102⁎⁎⁎ −0.0030 −0.0038
(0.0013) (0.0026) (0.0024)
IT2 × Establish 0.0911⁎⁎⁎ 0.1165⁎⁎⁎
(0.0311) (0.0332)
IT2 × Approve 0.0888⁎⁎⁎ −0.0316
(0.0197) (0.0509)
IT2 × Committee −0.0629⁎⁎ −0.0871⁎⁎⁎
(0.0289) (0.0312)
IT2 × Approve × Committee 0.1395⁎⁎⁎
(0.0564)
Controls Year Year Year Year Year Year Year
F 68.56⁎⁎⁎ 70.98⁎⁎⁎ 47.88⁎⁎⁎ 53.19⁎⁎⁎ 70.02⁎⁎⁎ 52.42⁎⁎⁎ 51.74⁎⁎⁎
Within R2 0.3667⁎⁎⁎ 0.3715⁎⁎⁎ 0.4149⁎⁎⁎ 0.4223⁎⁎⁎ 0.3707⁎⁎⁎ 0.4078⁎⁎⁎ 0.4142⁎⁎⁎

N = 185; standard errors are in parentheses.

Year dummies are omitted. AR(2) and spatial (interstate) correlation in residuals are assumed.
⁎ p b 0.1.
⁎⁎ p b 0.05.
⁎⁎⁎ p b 0.01.
a
Per capita budget of the central IT function.
b
The ratio (%) of the central IT function budget to total expenditures.

future research may directly study bureaucracy in IT management.
What's the nature of IT management bureaucracy and what causes it?
We do not expect that bureaucracy in IT management exists only in gov-
ernments; it may take place in for-profit firms as well. Future research
may study how chief executives, business managers, and board of direc-
tors or legislatures can address IT management bureaucracy. Second, re-
searchers may study the relationship between the legislature and the
CIO. Specifically, it would be interesting to study how involvement of
politicians in IT management affects the power and authority of the
CIO. Third, researchers may generalize our study by investigating how
board-of-directors in business firms, who play a role of principals as
elected politicians do in governments, affect IT management and busi-
ness value from IT investments [56,67].
Lastly, future research may investigate the effect of IT spending and
IT governance mechanisms on other performance indicators in the pub-
lic sector. Governments pursue far more diverse goals than for-profit or-
ganizations. In addition to efficiency, they aim at providing quality
public services, promoting economic development, and preserving
equity, fairness, and rule of law. Interesting research questions to IS re-
searchers include what impact IT spending and IT governance together
have on effectiveness in administration and public service delivery or
overall social welfare. For example, it would be interesting to see how
IT investments improve the satisfaction of Medicaid beneficiaries or
affect the effective operation of the Health Insurance Exchange that,
mandated by the Affordable Care Act, state governments will be in
charge of.
284 M.-S. Pang / Decision Support Systems 59 (2014) 274–285
(a) From Table 8, Column (4)
Average Cost Reduction
15
12
9
6 tive analysis of FDH, DEA, and econometric approaches, Regional Science and
3 dependent panel data, The Review of Economics and Statistics 80 (2006) 549–560.
0 Science 31 (1985) 134–148.
-3
-6
(b) From Table 8, Column (7)
Average Cost Reduction
15
12
9
6 planning integration, IEEE Transactions on Engineering Management 54 (2007)
3 available at http://www.datamation.com/career/article.php/3517211/2005(accessed
0 [30] T.C. Koopmans, An analysis of production as an efficient combination of activities,
-3
-6
Establish = 1; The verticalaxis indicates an average cost reduction in operation
expenses and capital deprecations from a $1 increase in IT budget; Dashed lines
are 95% confidence intervals.
Fig. 1. The average cost reduction from IT spending.
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Min-Seok Pang is an assistant professor of management information systems at Temple
University's Fox School of Business. He has a Ph.D. in Business Administration from the
Stephen M. Ross School of Business at the University of Michigan, as well as an M.S. in
Management and B.S. in Industrial Engineering from the Korea Advanced Institute of Sci-
ence and Technology. His research has been published in such journals as Information Sys-
tems Research, MIS Quarterly, and International Journal of Electronic Commerce. His research
interests include IT business value, IT governance, Electronic Governments, and Online
and Network Services.