Productivity-Enhancing Demand Shocks: Evidence from the U.S. Ethanol Boom

Abstract

This paper examines the effect of demand on productivity. We exploit the Energy Policy Act of 2005 as a natural experiment which generated plausibly exogenous variation in the capacity of ethanol plants to establish the causal effect of demand on productivity within the corn sector. Using physical output productivity measures we show that the demand shock caused firms to increase productivity by 35% and provide evidence that this was driven by demand altering final goods’ prices which spurred technology adoption. This finding cannot be explained by reallocation effects and is robust to a barrage of robustness, falsification, and placebo tests.

Keywords: Demand shocks, productivity, technology adoption

JEL Classification: D22, D24, L16, Q11