Is there too much or too little private research and development (R&D)? A large empirical literature reports estimates of the rate of return to R&D ranging from 30% to over 100%, supporting the notion that there is too little private investment in research. However, this conclusion is challenged by the new growth theory, which emphasizes a richer description of the connection between R&D and productivity. In this paper we bridge the gap between the theoretical and empirical literatures. Using the framework of an R&D-based growth model, we derive analytically the relationship between the social rate of return to R&D and the coefficient estimates of the empirical literature. Somewhat surprisingly, we show that these estimates represent a lower bound on the true social rate of return. Furthermore, our analytic framework provides a direct mapping from the rate of return to the degree of underinvestment in research. Using a conservative estimate of the rate of return to R&D of about 30%, optimal R&D investment is at least four times larger than actual investment.
This is a substantially revised version of an earlier paper, "Too Much of a Good Thing? The Economics of Investment in R&D"
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Paper provided by Stanford University, Department of Economics in its series Working Papers with number
97002.
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Zvi Griliches, 1998.
"The Search for R&D Spillovers,"
NBER Chapters,
in: R&D and Productivity: The Econometric Evidence, pages 251-268
National Bureau of Economic Research, Inc.
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