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Too Much of a Good Thing? The Economics of Investment in R&D

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Author Info
Charles I. Jones
John C. Williams

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Abstract

Research and development (R&D) is a key determinant of long run productivity and welfare. A central issue is whether a decentralized economy undertakes too little or too much R&D. We develop an endogenous growth model that incorporates parametrically four important distortions to R&D: the surplus appropriability problem, knowledge spillovers, creative destruction, and congestion externalities. We show that our model is consistent with the available evidence on R&D, growth, and markups. Calibrating the model to micro and macro data, we find that the decentralized economy typically underinvests in R&D relative to what is socially optimal. The only exceptions to this conclusion occur when both the congestion externality is extremely strong and the equilibrium real interest rate is very high. These results are robust to reasonable variations in model parameters.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7283.

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Date of creation: Aug 1999
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Handle: RePEc:nbr:nberwo:7283

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Find related papers by JEL classification:
O31 - Economic Development, Technological Change, and Growth - - Technological Change - - - Innovation and Invention: Processes and Incentives
O41 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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  2. Stokey, Nancy L, 1995. "R&D and Economic Growth," Review of Economic Studies, Blackwell Publishing, vol. 62(3), pages 469-89, July. [Downloadable!] (restricted)
  3. Bronwyn H. Hall., 1992. "Investment and Research and Development at the Firm Level: Does the Source of Financing Matter?," Economics Working Papers 92-194, University of California at Berkeley.
    Other versions:
  4. Mansfield, Edwin & Schwartz, Mark & Wagner, Samuel, 1981. "Imitation Costs and Patents: An Empirical Study," Economic Journal, Royal Economic Society, vol. 91(364), pages 907-18, December. [Downloadable!] (restricted)
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  7. Nestor Terleckyj, 1980. "Direct and Indirect Effects of Industrial Research and Development on the Productivity Growth of Industries," NBER Chapters, in: New Developments in Productivity Measurement, pages 357-386 National Bureau of Economic Research, Inc. [Downloadable!]
  8. Griliches, Zvi, 1992. " The Search for R&D Spillovers," Scandinavian Journal of Economics, Blackwell Publishing, vol. 94(0), pages S29-47, Supplemen.
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  9. Adam B. Jaffe, 1986. "Technological Opportunity and Spillovers of R&D: Evidence from Firms' Patents, Profits and Market Value," NBER Working Papers 1815, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  11. Rivera-Batiz, Luis A & Romer, Paul M, 1991. "Economic Integration and Endogenous Growth," The Quarterly Journal of Economics, MIT Press, vol. 106(2), pages 531-55, May. [Downloadable!] (restricted)
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  12. Basu, Susanto, 1996. "Procyclical Productivity: Increasing Returns or Cyclical Utilization?," The Quarterly Journal of Economics, MIT Press, vol. 111(3), pages 719-51, August. [Downloadable!] (restricted)
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  13. Kydland, Finn E & Prescott, Edward C, 1991. "Hours and Employment Variation in Business Cycle Theory," Economic Theory, Springer, vol. 1(1), pages 63-81, January.
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  15. Bernstein, Jeffrey I & Nadiri, M Ishaq, 1989. "Research and Development and Intra-industry Spillovers: An Empirical Application of Dynamic Duality," Review of Economic Studies, Blackwell Publishing, vol. 56(2), pages 249-67, April. [Downloadable!] (restricted)
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  16. Sveikauskas, Leo, 1981. "Technological Inputs and Multifactor Productivity Growth," The Review of Economics and Statistics, MIT Press, vol. 63(2), pages 275-82, May. [Downloadable!] (restricted)
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  21. M. Ishaq Nadiri, 1993. "Innovations and Technological Spillovers," NBER Working Papers 4423, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  22. Charles I. Jones & John C. Williams, 1998. "Measuring The Social Return To R&D," The Quarterly Journal of Economics, MIT Press, vol. 113(4), pages 1119-1135, November. [Downloadable!] (restricted)
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  23. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth through Creative Destruction," Econometrica, Econometric Society, vol. 60(2), pages 323-51, March. [Downloadable!] (restricted)
    Other versions:
  24. Nadiri, M.I., 1993. "Innovations and Technological Spillovers," Working Papers 93-31, C.V. Starr Center for Applied Economics, New York University. [Downloadable!]
  25. Robert Evenson, 1984. "International Invention: Implications for Technology Market Analysis," NBER Chapters, in: R & D, Patents, and Productivity, pages 89-126 National Bureau of Economic Research, Inc. [Downloadable!]
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