Measuring the Returns to R&D: The Depreciation Problem
AbstractMeasuring the private returns to R&D requires knowledge of its private depreciation or obsolescence rate, which is inherently variable and responds to competitive pressure. Nevertheless, most of the previous literature has used a constant depreciation rate to construct R&D capital stocks and measure the returns to R&D, a rate usually equal to 15 per cent. In this paper I review the implications of this assumption for the measurement of returns using two different methodologies: one based on the production function and another that uses firm market value to infer returns. Under the assumption that firms choose their R&D investment optimally, that is, marginal expected benefit equals marginal cost, I show that both estimates of returns can be inverted to derive an implied depreciation rate for R&D capital. I then test these ideas on a large unbalanced panel of U.S. manufacturing firms for the years 1974 to 2003. The two methods do not agree, in that the production function approach suggests depreciation rates near zero (or even appreciation) whereas the market value approach implies depreciation rates ranging from 20 to 40 per cent, depending on the period. The concluding section discusses the possible reasons for this funding.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13473.
Date of creation: Oct 2007
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Publication status: published as Bronwyn H. Hall. "Measuring the Returns to R&D: The Depreciation Problem," in Jacques Mairesse and Manuel Trajtenberg, editors, "Contributions in Memory of Zvi Griliches" Annales D'Économie et de Statistique, 79-80, July-December 2005 (2010)
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- Bronwyn H. HALL, 2005. "Measuring the Returns to R&D: the Depreciation Problem," Annales d'Economie et de Statistique, ENSAE, issue 79-80, pages 341-381.
- Bronwyn H. Hall, 2010. "Measuring the Returns to R&D: The Depreciation Problem," NBER Chapters, in: Contributions in Memory of Zvi Griliches, pages 341-381 National Bureau of Economic Research, Inc.
- D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- L20 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - General
- O30 - Economic Development, Technological Change, and Growth - - Technological Change; Research and Development; Intellectual Property Rights - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-10-06 (All new papers)
- NEP-INO-2007-10-06 (Innovation)
- NEP-KNM-2007-10-06 (Knowledge Management & Knowledge Economy)
- NEP-MIC-2007-10-06 (Microeconomics)
- NEP-TID-2007-10-06 (Technology & Industrial Dynamics)
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