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Evidence of Induced Innovation in US Sectoral Capital’s Shares

  • Andrew T. Young

    (Department of Economics, West Virginia University)

  • Hernando Zuleta

    (Department of Economics, Universidad del Rosario American University in Bulgaria)

  • Andres Garcia-Suaza

    (Facultad de Economia, Universidad del Rosario – Bogota)

We use annual data on capital’s share and relative factor prices from 35 US industries from 1960 to 2005 to test the induced innovation hypothesis. We derive, from a production function framework, testable implications for the effect of contemporaneous and lagged factor price ratios on capital’s share of production. The predicted effect is positive or negative depending on the elasticity of substitution between labor and capital. From panel regressions, the estimated effect of the contemporaneous factor price ratio implies an elasticity of substitution that is less than unity, consistent with the consensus from the literature. Based on this, our negative estimated effects for lagged price ratios are both statistically significant and consistent with the induced innovation hypothesis.

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File URL: http://www.be.wvu.edu/phd_economics/pdf/10-03.pdf
File Function: First version, 2010
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Paper provided by Department of Economics, West Virginia University in its series Working Papers with number 10-03.

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Length: 27 pages
Date of creation: 2010
Date of revision:
Handle: RePEc:wvu:wpaper:10-03
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Web page: http://www.be.wvu.edu/phd_economics/
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  1. Ricardo J. Caballero & Eduardo M. R. A. Engel & John C. Haltiwanger, 1995. "Plant-Level Adjustment and Aggregate Investment Dynamics," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(2), pages 1-54.
  2. Benjamin Bental & Dominique Demougin, 2005. "Do Factor Shares Reflect Technology?," SFB 649 Discussion Papers SFB649DP2005-050, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  3. David Popp, 2002. "Induced Innovation and Energy Prices," American Economic Review, American Economic Association, vol. 92(1), pages 160-180, March.
  4. Hernando Zuleta, 2008. "An empirical note on factor shares," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 17(3), pages 379-390.
  5. Daron Acemoglu, 2001. "Directed Technical Change," NBER Working Papers 8287, National Bureau of Economic Research, Inc.
  6. Robert Chirinko & Steven M. Fazzari & Andrew P. Meyer, 2002. "That Elusive Elasticity: A Long-panel Approach to Estimating the Price Sensitivity of Business Capital," Emory Economics 0202, Department of Economics, Emory University (Atlanta).
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