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Estimating Production Functions with R&D Investment and Endogeneity


  • Young Gak Kim


This study analyses the production function estimation when there is an unobservable idiosyncratic productivity shock and the series of the productivity shock follows a first-order endogenous Markov process which is controlled by R&D investment. The production function approach, in general, suffers from endogeneity problems when there are determinants of production which are not observed by the econometrician but are observed by the manager of a firm. To control for this problem, recently developed econometric methods are applied to the production function estimation. The results show that there is a possibility that other estimation methods such as OLS estimation and fixed effect estimation underestimates the contribution of capital. The results also suggest that the rate of return to R&D varies considerably across industries and within an industry.

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  • Young Gak Kim, 2007. "Estimating Production Functions with R&D Investment and Endogeneity," Hi-Stat Discussion Paper Series d07-229, Institute of Economic Research, Hitotsubashi University.
  • Handle: RePEc:hst:hstdps:d07-229

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    References listed on IDEAS

    1. Fukao, Kyoji & Ma, Debin & Yuan, Tangjun, 2006. "International comparison in historical perspective: Reconstructing the 1934-1936 Benchmark purchasing power parity for Japan, Korea, and Taiwan," Explorations in Economic History, Elsevier, vol. 43(2), pages 280-308, April.
    2. Bassino, Jean‐Pascal & Ma, Debin & Saito, Osamu, 2005. "Levels of Real Wages in Historic China, Japan and Southern Europe, 1700-1920―A Review of Evidence―," Economic Review, Hitotsubashi University, vol. 56(4), pages 348-369, January.
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    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D

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