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Necessity Is the Mother of Invention: Input Supplies and Directed Technical Change
Author(s) -
Hanlon W. Walker
Publication year - 2015
Publication title -
econometrica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 16.7
H-Index - 199
eISSN - 1468-0262
pISSN - 0012-9682
DOI - 10.3982/ecta10811
Subject(s) - exploit , forcing (mathematics) , relative price , economics , spanish civil war , technical change , shock (circulatory) , quality (philosophy) , agricultural economics , monetary economics , macroeconomics , computer science , political science , mathematics , productivity , law , medicine , mathematical analysis , philosophy , computer security , epistemology
This study provides causal evidence that a shock to the relative supply of inputs to production can (1) affect the direction of technological progress and (2) lead to a rebound in the relative price of the input that became relatively more abundant (the strong induced‐bias hypothesis). I exploit the impact of the U.S. Civil War on the British cotton textile industry, which reduced supplies of cotton from the Southern United States, forcing British producers to shift to lower‐quality Indian cotton. Using detailed new data, I show that this shift induced the development of new technologies that augmented Indian cotton. As these new technologies became available, I show that the relative price of Indian/U.S. cotton rebounded to its pre‐war level, despite the increased relative supply of Indian cotton. This is the first paper to establish both of these patterns empirically, lending support to the two key predictions of leading directed technical change theories.