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Firm's R & D Behavior Under Rational Expectations

Author

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  • Lakshmi K. Raut

    (California State University at Fullerton, Department of Economics, Fullerton, CA92834, USA)

Abstract

This paper formulates the inter-temporal R&D investment decision problem of private firms using an optimal stochastic control framework. The paper explicitly derives the R&D investment decision rule and the cross equations parameter restrictions imposed by the hypothesis of rational expectations, using only the Riccati equation, and not requiring the Wiener-Kolmogorov prediction formula. Identification and estimation of the structural parameters are essential for evaluating policies to be free from Lucas critique. The paper finds conditions for identification of structural parameters, and discusses econometric procedures for estimation of structural parameters, and testing of the model.

Suggested Citation

  • Lakshmi K. Raut, 2005. "Firm's R & D Behavior Under Rational Expectations," Indian Economic Review, Department of Economics, Delhi School of Economics, vol. 40(2), pages 127-144, December.
    • Handle: RePEc:dse:indecr:v:40:y:2005:i:2:p:127-144
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    Keywords

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    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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