Can Stimulating Demand Drive Costs Down? World War II as a Natural Experiment

61 Pages Posted: 23 Feb 2020 Last revised: 1 Jun 2020

See all articles by Francois Lafond

Francois Lafond

University of Oxford - Institute for New Economic Thinking at the Oxford Martin School; University of Oxford - Mathematical Institute

Diana Seave Greenwald

National Gallery of Art

J. Doyne Farmer

University of Oxford

Date Written: June 1, 2020

Abstract

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

Lafond, Francois and Greenwald, Diana Seave and Farmer, J. Doyne, Can Stimulating Demand Drive Costs Down? World War II as a Natural Experiment (June 1, 2020). Available at SSRN: https://ssrn.com/abstract=3519913 or http://dx.doi.org/10.2139/ssrn.3519913

Francois Lafond (Contact Author)

University of Oxford - Institute for New Economic Thinking at the Oxford Martin School ( email )

Eagle House
Walton Well Road
Oxford, OX2 6ED
United Kingdom

University of Oxford - Mathematical Institute ( email )

Andrew Wiles Building
Radcliffe Observatory Quarter (550)
Oxford, OX2 6GG
United Kingdom

Diana Seave Greenwald

National Gallery of Art ( email )

Washington, DC
United States

J. Doyne Farmer

University of Oxford ( email )

Mansfield Road
Oxford, Oxfordshire OX1 4AU
United Kingdom

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