Demand-driven technical change and productivity growth: theory and evidence from the Energy Policy Act

We present novel evidence on the effect of market size on technology adoption and productivity. Our tests exploit a natural experiment in the U.S. corn industry where changes to national energy policy created exogenous increases in demand. Difference‐in‐difference estimates show that the demand shock caused technical change as corn producers adopted higher quality seeds which in turn raised productivity by 7%. We develop a simple model that formalizes the mechanisms underlying our results.