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R&D capitalization vs. R&D expensing: A theoretical model with policy implications

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  • Wang, Yongying

Abstract

The aim of this study is to establish a theoretical model to investigate the incentives of firms for choosing R&D capitalization. We focus on a monopoly firm managed by a typically myopic manager. In a two-stage setting, the manager determines the level of R&D prior to its output decision. Our model indicates that capitalizing some R&D costs yields higher profitability than fully expensing such investments. Moreover, we show that a longer useful life of capitalized assets is favorable for both consumer surplus and social welfare; thus, policy-makers should encourage policies that support extended lifespans of these assets.

Suggested Citation

  • Wang, Yongying, 2024. "R&D capitalization vs. R&D expensing: A theoretical model with policy implications," Finance Research Letters, Elsevier, vol. 67(PB).
    • Handle: RePEc:eee:finlet:v:67:y:2024:i:pb:s1544612324009504
    DOI: 10.1016/j.frl.2024.105920
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    References listed on IDEAS

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    1. d'Aspremont, Claude & Jacquemin, Alexis, 1988. "Cooperative and Noncooperative R&D in Duopoly with Spillovers," American Economic Review, American Economic Association, vol. 78(5), pages 1133-1137, December.
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    More about this item

    Keywords

    Capitalization; Expensing; Investment; Monopoly; R&D;
    All these keywords.

    JEL classification:

    • D25 - Microeconomics - - Production and Organizations - - - Intertemporal Firm Choice: Investment, Capacity, and Financing
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies

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