Directed Technical Change as a Response to Natural Resource Scarcity

We develop a quantitative macroeconomic theory of input-saving technical change to analyze how markets economize on scarce natural resources, with an application fossil fuel. find that aggregate US data call for very low short-run substitution elasticity between energy and the capital/labor inputs. Our estimates imply energy-saving took off when oil shocks hit in 1970s. This response implies significant substitutability other inputs long run: even under ever-rising prices, long-run consumption growth is still possible, along modest factor share energy.