Biased Technological Change and the Relative Abundance of Natural Resources

by Boyce, John

This paper documents that natural resources that are more abundant have higher production, lower prices, higher primary industry revenues, and higher R&D. These empirical facts are explained by a model of biased technological change in which relatively more abundant resources attract greater R&D because the return from obtaining a patent is higher in larger markets. Resource specific R&D may be targeted either towards upstream extraction technologies or towards downstream production technologies, and R&D is subject to diminishing knowledge spillovers and diminishing productivity of labor. The estimated elasticity of substitution between natural resources is greater than one, implying that natural resources are substitutes in production. Declining real resource prices in the face of rising resource production are explained by the increasing productivity of labor as knowledge stocks grow.

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