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Firm's R&D Behavior Under Rational Expectations

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  • Lakshmi K. Raut

    (University of Hawaii-Manoa)

Abstract

This paper formulates dynamic R\&D investment decisions of private firms as an optimal stochastic control problem. It derives explicitly R\&D investment decision rule and the cross equations parameter restrictions imposed by the rational expectations hypothesis, using the Riccati equations only and not requiring the use of Wiener-Kolmogorov prediction formula. Identification and estimation of the structural parameters are essential for evaluating policies such as R\&D subsidies, firm size, market concentration so that the evaluations of these policies stand against Lucas critique. We find conditions under which the structural parameters are identified; we then discuss econometric procedures for using aggregate time series data or panel data on firms to deal with unobserved technological knowledge, to estimate the structural parameters, and to test the model.

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Bibliographic Info

Paper provided by EconWPA in its series Development and Comp Systems with number 9705004.

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Length: 22 pages
Date of creation: 30 May 1997
Date of revision:
Handle: RePEc:wpa:wuwpdc:9705004

Note: Type of Document - postscript; prepared on IBM PC - PC-TEX; to print on PostScript; pages: 22 ; figures: no-figures. For comments and reference.
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Web page: http://128.118.178.162

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Keywords: R&D; Rational Expectations; stochastic control;

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References

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  1. Nelson, Richard R & Winter, Sidney G, 1977. "Simulation of Schumpeterian Competition," American Economic Review, American Economic Association, vol. 67(1), pages 271-76, February.
  2. Ariel Pakes & Zvi Griliches, 1980. "Patents and R and D at the Firm Level: A First Look," NBER Working Papers 0561, National Bureau of Economic Research, Inc.
  3. L. K. Raut, 1988. "R & D Behaviour of Indian Firms: A Stochastic Control Model," Indian Economic Review, Department of Economics, Delhi School of Economics, vol. 23(2), pages 207-229, July.
  4. Lars Peter Hansen & Thomas J. Sargent, 1979. "Formulating and estimating dynamic linear rational expectations models," Working Papers 127, Federal Reserve Bank of Minneapolis.
  5. Raut, Lakshmi K., 1995. "R & D spillover and productivity growth: Evidence from Indian private firms," Journal of Development Economics, Elsevier, vol. 48(1), pages 1-23, October.
  6. Jacques Mairesse & Mohamed Sassenou, 1991. "R&D Productivity: A Survey of Econometric Studies at the Firm Level," NBER Working Papers 3666, National Bureau of Economic Research, Inc.
  7. Richard Levin & Peter C. Reiss, 1984. "Tests of a Schumpeterian Model of R&D and Market Structure," NBER Chapters, in: R & D, Patents, and Productivity, pages 175-208 National Bureau of Economic Research, Inc.
  8. Rosenberg, Joel B, 1976. "Research and Market Share: A Reappraisal of the Schumpeter Hypothesis," Journal of Industrial Economics, Wiley Blackwell, vol. 25(2), pages 101-12, December.
  9. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
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