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Estimating Production Functions with R&D Investment and Endogeneity

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  • Young Gak Kim
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    Abstract

    This study analyses the production function estimation when there is an unobservable idiosyncratic productivity shock and the series of the productivity shock follows a first-order endogenous Markov process which is controlled by R&D investment. The production function approach, in general, suffers from endogeneity problems when there are determinants of production which are not observed by the econometrician but are observed by the manager of a firm. To control for this problem, recently developed econometric methods are applied to the production function estimation. The results show that there is a possibility that other estimation methods such as OLS estimation and fixed effect estimation underestimates the contribution of capital. The results also suggest that the rate of return to R&D varies considerably across industries and within an industry.

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    File URL: http://hi-stat.ier.hit-u.ac.jp/research/discussion/2007/pdf/D07-229.pdf
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    Bibliographic Info

    Paper provided by Institute of Economic Research, Hitotsubashi University in its series Hi-Stat Discussion Paper Series with number d07-229.

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    Date of creation: Dec 2007
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    Handle: RePEc:hst:hstdps:d07-229

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