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Estimating Production Functions with R&D Investment and Endogeneity

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Author Info
Young Gak Kim
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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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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Find related papers by JEL classification:
D24 - Microeconomics - - Production and Organizations - - - Production; Capital and Total Factor Productivity; Capacity
O32 - Economic Development, Technological Change, and Growth - - Technological Change - - - Management of Technological Innovation and R&D

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  1. Hayashi, Fumio & Inoue, Tohru, 1991. "The Relation between Firm Growth and Q with Multiple Capital Goods: Theory and Evidence from Panel Data on Japanese Firms," Econometrica, Econometric Society, vol. 59(3), pages 731-53, May. [Downloadable!] (restricted)
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  2. David H. Good & M. Ishaq Nadiri & Robin C. Sickles, 1996. "Index Number and Factor Demand Approaches to the Estimation of Productivity," NBER Working Papers 5790, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Wildasin, David E, 1984. "The q Theory of Investment with Many Capital Goods," American Economic Review, American Economic Association, vol. 74(1), pages 203-10, March. [Downloadable!] (restricted)
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