Abstract:

For many products, increases in cumulative production are associated with decreasing unit costs. However, a serious problem of reverse causality (lower prices leading to increasing demand) makes it difficult to use this relationship for policy. We study World War II, during which the demand for military products was largely exogenous, and the correlation between production, cumulative production 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.

Citation:

Lafond,F., Greenwald, D. & Farmer, J.D. (2020). 'Can stimulating demand drive costs down? World War II as a natural experiment'. INET Oxford Working Paper No. 2020-02.
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