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Resource Misallocation in the Presence of R&D Spillovers

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Abstract

We study resource misallocation by explicitly modelling R&D input and knowledge spillovers. The effects of R&D and spillovers on firm-level productivity are extensively studied in applied work, but not in the context of resource misallocation. We establish that, in the presence of spillovers, efficient resource allocation requires that more productive firms face higher R&D input prices. Analysing UK firm-level data, we find that the output gains from correcting misallocation are greatly overestimated when spillovers are ignored. Output losses due to capital distortions dominate those from labour and R&D inputs. Adopting a wrong R&D policy could lead to significant output losses.

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  • Li, Kun & Azacis, Helmuts & Luintel, Kul B, 2023. "Resource Misallocation in the Presence of R&D Spillovers," Cardiff Economics Working Papers E2023/24, Cardiff University, Cardiff Business School, Economics Section.
    • Handle: RePEc:cdf:wpaper:2023/24
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    More about this item

    Keywords

    resource misallocation; productivity; R&D spillover; the UK manufacturing firms;
    All these keywords.

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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