An error correction model of induced innovation in UK agriculture

Abstract

Cointegration techniques are applied to a model of induced innovation based on the two-stage Constant Elasticity of Substitution (CES) production function. This approach results in direct tests of the inducement hypothesis, which are applied to agricultural data for the United Kingdom from 1953 to 2000. The time series properties of the variables are checked, cointegration is established and an Error Correction Model (ECM) constructed, which attempts to separate factor substitution from technological change. Finally, the ECM formulation is subjected to causality tests, which show that the factor price ratio for chemicals and land is Granger-prior to the factor-saving bias of technological change. However, long-run relative prices are not causally prior to the machinery/labour ratio. This results from perturbations in the user cost of machinery, caused by oil price shocks. Thus, the Induced Innovation Hypothesis (IIH) may explain long-run transformations like the mechanical and fertilizer revolutions that dominated the twentieth century, but not reflect short-run price volatility.