IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Research and development, profits and firm value: a structural estimation

  • Missaka Warusawitharana

Is the return to private R&D as high as believed? This study identifies a flaw in the production function approach to estimating the return to R&D. I provide new estimates based on a structural estimation approach that incorporates uncertainty about the outcome from R&D. The results shed light on the rate of innovation, the impact of an innovation on profits, and the market value of the R&D stock. The parameter estimates imply a mean return to R&D of 3.7-5.5%, much lower than previous values. The analysis also demonstrates the unsuitability of using the return to R&D as a basis for policy decisions on tax subsidies to R&D.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.federalreserve.gov/pubs/feds/2008/200852/200852abs.html
Download Restriction: no

File URL: http://www.federalreserve.gov/pubs/feds/2008/200852/200852pap.pdf
Download Restriction: no

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2008-52.

as
in new window

Length:
Date of creation: 2008
Date of revision:
Handle: RePEc:fip:fedgfe:2008-52
Contact details of provider: Postal: 20th Street and Constitution Avenue, NW, Washington, DC 20551
Web page: http://www.federalreserve.gov/

More information through EDIRC

Order Information: Web: http://www.federalreserve.gov/pubs/feds/fedsorder.html

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Zvi Griliches, 1998. "Issues in Assessing the Contribution of Research and Development to Productivity Growth," NBER Chapters, in: R&D and Productivity: The Econometric Evidence, pages 17-45 National Bureau of Economic Research, Inc.
  2. Philippe Aghion & Nick Bloom & Richard Blundell & Rachel Griffith & Peter Howitt, 2005. "Competition and Innovation: An Inverted-U Relationship," The Quarterly Journal of Economics, MIT Press, vol. 120(2), pages 701-728, May.
  3. Whited, Toni M, 1992. " Debt, Liquidity Constraints, and Corporate Investment: Evidence from Panel Data," Journal of Finance, American Finance Association, vol. 47(4), pages 1425-60, September.
  4. Cogley, Timothy & Sargent, Thomas J., 2008. "The market price of risk and the equity premium: A legacy of the Great Depression?," Journal of Monetary Economics, Elsevier, vol. 55(3), pages 454-476, April.
  5. Michele Boldrin & David K Levine, 2002. "Perfectly Competitive Innovation," Levine's Working Paper Archive 625018000000000192, David K. Levine.
  6. Nicholas Bloom, 2009. "The Impact of Uncertainty Shocks," Econometrica, Econometric Society, vol. 77(3), pages 623-685, 05.
  7. Nicholas Bloom & Mark Schankerman & John Van Reenen, 2007. "Identifying Technology Spillovers and Product Market Rivalry," NBER Working Papers 13060, National Bureau of Economic Research, Inc.
  8. Zvi Griliches & Jacques Mairesse, 1981. "Productivity and R and D at the Firm Level," NBER Working Papers 0826, National Bureau of Economic Research, Inc.
  9. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth through Creative Destruction," Econometrica, Econometric Society, vol. 60(2), pages 323-51, March.
  10. Joao F. Gomes, 2001. "Financing Investment," American Economic Review, American Economic Association, vol. 91(5), pages 1263-1285, December.
  11. Ravi Jagannathan & Ellen R. McGrattan & Anna Scherbina., 2000. "The declining U.S. equity premium," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 3-19.
  12. Gilbert, R. & Shapiro, C., 1988. "Optimal Patent Length And Breadth," Papers 28, Princeton, Woodrow Wilson School - Discussion Paper.
  13. James Claus, 2001. "Equity Premia as Low as Three Percent? Evidence from Analysts' Earnings Forecasts for Domestic and International Stock Markets," Journal of Finance, American Finance Association, vol. 56(5), pages 1629-1666, October.
  14. Diego Comin & Mark Gertler, 2006. "Medium-Term Business Cycles," American Economic Review, American Economic Association, vol. 96(3), pages 523-551, June.
  15. Klette, Tor Jakob & Kortum, Samuel S, 2002. "Innovating Firms and Aggregate Innovation," CEPR Discussion Papers 3248, C.E.P.R. Discussion Papers.
  16. Bronwyn H. Hall, 2010. "Measuring the Returns to R&D: The Depreciation Problem," NBER Chapters, in: Contributions in Memory of Zvi Griliches, pages 341-381 National Bureau of Economic Research, Inc.
  17. Eberly, Janice & Rebelo, Sérgio & Vincent, Nicolas, 2008. "Investment and Value: A Neoclassical Benchmark," CEPR Discussion Papers 6737, C.E.P.R. Discussion Papers.
  18. Hall, Bronwyn H. & Mairesse, Jacques, 1995. "Exploring the relationship between R&D and productivity in French manufacturing firms," Journal of Econometrics, Elsevier, vol. 65(1), pages 263-293, January.
  19. Nicholas Bloom & Rachel Griffith & John Van Reenen, 2007. "Do R&D Tax Credits Work? Evidence from a Panel of Countries 1979-1997," Discussion Papers 07-020, Stanford Institute for Economic Policy Research.
  20. Andrew B. Abel & Janice C. Eberly, . "A Unified Model of Investment Under Uncertainty," Rodney L. White Center for Financial Research Working Papers 14-93, Wharton School Rodney L. White Center for Financial Research.
  21. Robert E. Hall, 2000. "The stock market and capital accumulation," Proceedings, Federal Reserve Bank of San Francisco, issue Apr.
  22. Eugene Fama & F. & Kenneth R. French, . "The Equity Premium."," CRSP working papers 522, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  23. Charles I. Jones & John C. Williams, 1998. "Measuring The Social Return To R&D," The Quarterly Journal of Economics, MIT Press, vol. 113(4), pages 1119-1135, November.
  24. Paul Romer, 1989. "Endogenous Technological Change," NBER Working Papers 3210, National Bureau of Economic Research, Inc.
  25. Russell W. Cooper & John C. Haltiwanger, 2000. "On the Nature of Capital Adjustment Costs," NBER Working Papers 7925, National Bureau of Economic Research, Inc.
  26. Bart Hobijn & Boyan Jovanovic, 2001. "The Information-Technology Revolution and the Stock Market: Evidence," American Economic Review, American Economic Association, vol. 91(5), pages 1203-1220, December.
  27. Eaton, Jonathan & Kortum, Samuel, 1999. "International Technology Diffusion: Theory and Measurement," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(3), pages 537-70, August.
  28. Gadi Barlevy, 2007. "On the Cyclicality of Research and Development," American Economic Review, American Economic Association, vol. 97(4), pages 1131-1164, September.
  29. Russell Cooper & Joao Ejarque, 2003. "Financial Frictions and Investment: Requiem in Q," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(4), pages 710-728, October.
  30. Bronwyn H. Hall & John van Reenen, 1999. "How Effective are Fiscal Incentives for R&D? A New Review of the Evidence," NBER Working Papers 7098, National Bureau of Economic Research, Inc.
  31. Tauchen, George & Hussey, Robert, 1991. "Quadrature-Based Methods for Obtaining Approximate Solutions to Nonlinear Asset Pricing Models," Econometrica, Econometric Society, vol. 59(2), pages 371-96, March.
  32. Christopher A. Hennessy & Toni M. Whited, 2005. "Debt Dynamics," Journal of Finance, American Finance Association, vol. 60(3), pages 1129-1165, 06.
  33. James R. Brown & Steven M. Fazzari & Bruce C. Petersen, 2009. "Financing Innovation and Growth: Cash Flow, External Equity, and the 1990s R&D Boom," Journal of Finance, American Finance Association, vol. 64(1), pages 151-185, 02.
  34. Gourieroux, C. & Monfort, A. & Renault, E., 1992. "Indirect Inference," Papers 92.279, Toulouse - GREMAQ.
  35. Samuel S. Kortum, 1997. "Research, Patenting, and Technological Change," Econometrica, Econometric Society, vol. 65(6), pages 1389-1420, November.
  36. Dongmei Li, 2011. "Financial Constraints, R&D Investment, and Stock Returns," Review of Financial Studies, Society for Financial Studies, vol. 24(9), pages 2974-3007.
  37. Timothy Erickson & Toni M. Whited, 2000. "Measurement Error and the Relationship between Investment and q," Journal of Political Economy, University of Chicago Press, vol. 108(5), pages 1027-1057, October.
  38. Christopher A. Hennessy & Toni M. Whited, 2007. "How Costly Is External Financing? Evidence from a Structural Estimation," Journal of Finance, American Finance Association, vol. 62(4), pages 1705-1745, 08.
  39. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth Through Creative Destruction," Scholarly Articles 12490578, Harvard University Department of Economics.
  40. Hall, Bronwyn & Van Reenen, John, 2000. "How effective are fiscal incentives for R&D? A review of the evidence," Research Policy, Elsevier, vol. 29(4-5), pages 449-469, April.
  41. Jones, Charles I, 1995. "Time Series Tests of Endogenous Growth Models," The Quarterly Journal of Economics, MIT Press, vol. 110(2), pages 495-525, May.
  42. Boyan Jovanovic & Jeremy Greenwood, 1999. "The Information-Technology Revolution and the Stock Market," American Economic Review, American Economic Association, vol. 89(2), pages 116-122, May.
  43. Louis K. C. Chan, 2001. "The Stock Market Valuation of Research and Development Expenditures," Journal of Finance, American Finance Association, vol. 56(6), pages 2431-2456, December.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:fip:fedgfe:2008-52. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Kris Vajs)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.