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

Abstract

The leading theory of directed technical change, developed by Acemoglu (2002), offers two main predictions. First, when inputs are sufficiently substitutable, a change in relative input supplies will generate technical change that augments inputs which become relatively more abundant. Second, if this effect is sufficiently strong, the relative price of the relatively more abundant inputs will increase -- the strong induced-bias hypothesis. This paper provides the first empirical test of these predictions using the shock to the British cotton textile industry caused by the U.S. Civil War (1861-1865). Using detailed new patent data, I show that the shock increased innovation in Britain directed towards taking advantage of Indian cotton, which had became relatively more abundant. The relative price of Indian cotton first declined and then rebounded, consistent with strong induced-bias. Given my elasticity of substitution estimates, these findings are consistent with the predictions of the theory.