Can Stimulating Demand Drive Costs Down? World War II as a Natural Experiment
61 Pages Posted: 23 Feb 2020 Last revised: 1 Jun 2020
Date Written: June 1, 2020
For many products, increases in cumulative production are associated with de- creasing unit costs. However, a serious problem of reverse causality (lower prices leading to increasing demand) makes it difficult to use this relationship for pol- icy. We study World War II, during which the demand for military products was largely exogenous, and the correlation between production, cumulative produc- tion and an exogenous time trend was limited. Our results indicate that decreases in cost can be attributed roughly equally to the growth of experience and to an exogenous time trend.
Keywords: innovation policy; learning curve; natural experiment; World War II
JEL Classification: 031;038;N62
Suggested Citation: Suggested Citation