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Firm's R & D Behavior Under Rational Expectations


  • Lakshmi K. Raut

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


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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    References listed on IDEAS

    1. 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.
    2. 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.
    3. Hansen, Lars Peter & Sargent, Thomas J., 1980. "Formulating and estimating dynamic linear rational expectations models," Journal of Economic Dynamics and Control, Elsevier, vol. 2(1), pages 7-46, May.
    4. Rosenberg, Joel B, 1976. "Research and Market Share: A Reappraisal of the Schumpeter Hypothesis," Journal of Industrial Economics, Wiley Blackwell, vol. 25(2), pages 101-112, December.
    5. 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.
    6. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
    7. Nelson, Richard R & Winter, Sidney G, 1977. "Simulation of Schumpeterian Competition," American Economic Review, American Economic Association, vol. 67(1), pages 271-276, February.
    8. 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.
    9. 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.
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    More about this item


    Research and development; rational expectations; stochastic control; Lucas Critique.;

    JEL classification:

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


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