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Examination of the behavior of R&D returns using a power law

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  • Sébastien Casault
  • Aard J. Groen
  • Jonathan D. Linton

Abstract

This paper provides an improved model, based on historical data, that describes the returns on assets that result from R&D efforts to assist managers of public and private R&D activities. Such a model may lead to better decision support tools to monetize the value that may be extracted from R&D, which is otherwise often undervalued. Real option pricing models are used to gauge appropriate funding levels for assets such as R&D projects that contain large time-dependent uncertainties. However, this study finds that assuming the Gaussian distribution describes fluctuations in value is not appropriate for assets whose value is derived from R&D activities. This conclusion is based on a study of 43 military R&D projects and 100 technology-intensive small firms. A power law, such as the Cauchy distribution, is shown to be more accurate in describing fluctuations in returns from R&D investments. Copyright The Author 2012. Published by Oxford University Press. All rights reserved. For Permissions, please email: journals.permissions@oup.com, Oxford University Press.

Suggested Citation

  • Sébastien Casault & Aard J. Groen & Jonathan D. Linton, 2012. "Examination of the behavior of R&D returns using a power law," Science and Public Policy, Oxford University Press, vol. 40(2), pages 219-228, November.
    • Handle: RePEc:oup:scippl:v:40:y:2012:i:2:p:219-228
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    File URL: http://hdl.handle.net/10.1093/scipol/scs082
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    Cited by:

    1. Jonathan Linton & Nicholas Vonortas, 2015. "From Research Project to Research Portfolio: Meeting Scale and Complexity," Foresight and STI Governance (Foresight-Russia till No. 3/2015), National Research University Higher School of Economics, vol. 9(2), pages 38-43.

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