We study how demand shocks affect productivity by provoking technical change. Our model shows that increasing demand leads to technical change and productivity improvements through a direct market size effect and an indirect competition effect. We test the predictions using a natural experiment in the US corn industry where changes to national energy policy created exogenous increases in demand. Estimates show that the increase in demand caused technical change as corn producers adopted new technologies which in turn raised productivity by 5.7% per annum in the five years after the policy change. Although both channels are found to motivate technical change, the economic magnitude of the direct effect substantially outweighs the indirect effect.
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Giammario Impullitti, Richard Kneller and Danny McGowan
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