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Innovation and Welfare: Results from Joint Estimation of Production and Demand Functions

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  • Jordi Jaumandreu
  • Jacques Mairesse

Abstract

This paper develops a simple framework to estimate the parameters of the production function together with the elasticity of the demand for the output and the impact of demand and cost shifters. The use of this framework helps, in the first place, to treat successfully the difficult problem of the endogeneity of input quantities. But it also provides a natural way to assess the welfare effects of firms’ innovative actions by estimating their impact on both cost and demand. We show that the total current period (static) welfare gains of introducing a process or a product innovation are, on average, about 1.6% and 4%, respectively, of the value of the firm's current sales. The increase in consumer surplus amounts to two- thirds of these gains in the first case and half in the second.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16221.

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Date of creation: Jul 2010
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Handle: RePEc:nbr:nberwo:16221

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