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Recalibrating the Reported Returns to Agricultural R&D: What if We All Heeded Griliches?

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  • Rao, Xudong
  • Hurley, Terrance M.
  • Pardey, Philip G.

Abstract

Zvi Griliches’ seminal analysis of hybrid corn spawned a large literature seeking to quantify and demonstrate the value of agricultural research and development (R&D) investments. The most important metric for quantifying the rate of return to R&D emerging from this literature is the internal rate of return (IRR), even though Griliches was skeptical of its usefulness as a metric in this context. An alternative metric, also reported by Griliches but not as commonly used in the subsequent returns-to-research literature, is the benefit-cost ratio (BCR). We assess how the implications of the returns to agricultural R&D literature may have differed if the BCR had become the standard rather than the IRR. We reveal that the IRR and BCR produce substantially different rankings of agricultural R&D projects; differences that persist even under substantial commodity and geographical aggregations of the BCR and IRR estimates. The median across 2,627 reported IRRs is 37.5 percent per year. Using data gleaned from 492 research evaluation studies, we developed and deployed a methodology to impute 2,126 BCRs (median of 5.4) and modified internal rates of returns, MIRRs (16.4 percent per year) assuming a uniform 10 percent per year discount rate and a 30-year research timeline.

Suggested Citation

  • Rao, Xudong & Hurley, Terrance M. & Pardey, Philip G., 2019. "Recalibrating the Reported Returns to Agricultural R&D: What if We All Heeded Griliches?," Staff Papers 298430, University of Minnesota, Department of Applied Economics.
  • Handle: RePEc:ags:umaesp:298430
    DOI: 10.22004/ag.econ.298430
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    References listed on IDEAS

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    1. Martin J. Bailey, 1959. "Formal Criteria for Investment Decisions," Journal of Political Economy, University of Chicago Press, vol. 67, pages 476-476.
    2. Graham, John R. & Harvey, Campbell R., 2001. "The theory and practice of corporate finance: evidence from the field," Journal of Financial Economics, Elsevier, vol. 60(2-3), pages 187-243, May.
    3. Zvi Griliches, 1958. "Research Costs and Social Returns: Hybrid Corn and Related Innovations," Journal of Political Economy, University of Chicago Press, vol. 66, pages 419-419.
    4. Lindon J. Robison & Peter J. Barry & Robert J. Myers, 2015. "Consistent IRR and NPV rankings," Agricultural Finance Review, Emerald Group Publishing, vol. 75(4), pages 499-513, November.
    5. Giang Truong & Graham Partington & Maurice Peat, 2008. "Cost-of-Capital Estimation and Capital-Budgeting Practice in Australia," Australian Journal of Management, Australian School of Business, vol. 33(1), pages 95-121, June.
    6. Terrance M. Hurley & Xudong Rao & Philip G. Pardey, 2014. "Re-examining the Reported Rates of Return to Food and Agricultural Research and Development," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 96(5), pages 1492-1504.
    7. J. Hirshleifer, 1958. "On the Theory of Optimal Investment Decision," Journal of Political Economy, University of Chicago Press, vol. 66, pages 329-329.
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    Cited by:

    1. Julian M. Alston & Phillip G. Pardey, 2020. "Innovation, Growth, and Structural Change in American Agriculture," NBER Chapters, in: The Role of Innovation and Entrepreneurship in Economic Growth, National Bureau of Economic Research, Inc.
    2. Kym Anderson, 2018. "From taxing to subsidizing farmers in China post-1978," China Agricultural Economic Review, Emerald Group Publishing, vol. 10(1), pages 36-47, February.

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    Keywords

    Agricultural and Food Policy; Agricultural Finance; Research Methods/ Statistical Methods;

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