Abstract
Prior tests of Hicks’ Induced Innovation Hypothesis (IIH) have been greatly hampered because the lack of supply-side data implicitly requires the untenable assumption that the marginal research cost is the same for different inputs. We document that, with appropriate model specification and panel data, a two-way fixed-effects estimator can account for much of the non-neutrality of the innovation function. Using a test procedure that is robust to a time-variant and non-neutral innovation function, we test the IIH in U.S. agriculture for the period 1960–2004. We use only readily available data for innovation demand and total public research expenditures.
Highlights
The induced innovation hypothesis (IIH) postulated by Hicks (1932) more than 80 years ago has captured much attention because of the theoretical appeal that prices may be important for input choices and for technology development to save inputs that become relatively more expensive
Our analytical results show that when the elasticity of substitution between two inputs is less than one plus the magnitude of the innovation concavity parameter, a rise in the relative expected price of an input results in its relatively lower use
We document that the relationship between expected input prices and factor augmentation is a non-monotonic function of the elasticity of substitution when the innovation function is accounted for
Summary
The induced innovation hypothesis (IIH) postulated by Hicks (1932) more than 80 years ago has captured much attention because of the theoretical appeal that prices may be important for input choices and for technology development to save inputs that become relatively more expensive. It took more than 30 years before the theoretical foundations began to be established (e.g., Kennedy 1964; Samuelson 1965; Ahmad 1966; Kamien and Schwartz 1968; Binswanger 1974a), Hayami and Ruttan’s (1970) tests of the IIH quickly inaugurated a large body of literature devoted to determining the empirical validity of the IIH in a wide range of industries and countries. If the IIH is valid, price interventions are expected to have multistage effects through research and development (R&D) resource allocation decisions
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