Econometrica: Jan 2015, Volume 83, Issue 1

Necessity is the Mother of Invention: Input Supplies and Directed Technical Change

https://doi.org/10.3982/ECTA10811
p. 67-100

W. Walker Hanlon

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.



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Supplement to "Necessity is the Mother of Invention: Input Supplies and Directed Technical Change"

This online appendix includes (1) additional details about the empirical setting, (2) further information about the data used and (3) additional empirical results and robustness checks.

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Supplement to "Necessity is the Mother of Invention: Input Supplies and Directed Technical Change"

This zip file contains the replication files for the manuscript.

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