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

Daegoon Lee, Benjamin W. Cowan and C. Shumway

Agricultural and Resource Economics Review, 2020, vol. 49, issue 3, 465-491

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.

Date: 2020
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