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Cost-Reducing and Demand-Creating R&D with Spillovers

  • Richard C. Levin
  • Peter C. Reiss
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    This article analyzes R&D policies when the returns to cost-reducing and demand-creating R&D are imperfectly appropriable and market structure is endogenous. We generalize previous characterizations of appropriability to permit the possibility that own and rival R&D are imperfect substitutes. We also describe how equilibrium expenditures on process and product R&D, as well as equilibrium market structure, depend on technological opportunities and spillovers. In contrast to previous work, diminished appropriability does not necessarily reduce R&D expenditures. For example, under some conditions, an increase in the extent of process (product) spillovers will lead to an increase in product (process) R&D. We estimate several variants of the model by using manufacturing line-of-business data and data from a survey of R&D executives.

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    Article provided by The RAND Corporation in its journal RAND Journal of Economics.

    Volume (Year): 19 (1988)
    Issue (Month): 4 (Winter)
    Pages: 538-556

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    Handle: RePEc:rje:randje:v:19:y:1988:i:winter:p:538-556
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