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Non-Neutral Marginal Innovation Costs, Omitted Variables, and Induced Innovation

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  • Lee, Daegoon
  • Cowan, Benjamin W.
  • Shumway, C. Richard

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.

Suggested Citation

  • Lee, Daegoon & Cowan, Benjamin W. & Shumway, C. Richard, 2020. "Non-Neutral Marginal Innovation Costs, Omitted Variables, and Induced Innovation," Agricultural and Resource Economics Review, Cambridge University Press, vol. 49(3), pages 465-491, December.
    • Handle: RePEc:cup:agrerw:v:49:y:2020:i:3:p:465-491_4
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