Measuring the Returns to R&D: The Depreciation Problem
Measuring the private returns to R&D requires knowledge of its private depreciation or obsolescence rate, which is inherently variable and responds to competitive pressure. Nevertheless, most of the previous literature has used a constant depreciation rate to construct R&D capital stocks and measure the returns to R&D, a rate usually equal to 15 per cent. In this paper I review the implications of this assumption for the measurement of returns using two different methodologies: one based on the production function and another that uses firm market value to infer returns. Under the assumption that firms choose their R&D investment optimally, that is, marginal expected benefit equals marginal cost, I show that both estimates of returns can be inverted to derive an implied depreciation rate for R&D capital. I then test these ideas on a large unbalanced panel of U.S. manufacturing firms for the years 1974 to 2003. The two methods do not agree, in that the production function approach suggests depreciation rates near zero (or even appreciation) whereas the market value approach implies depreciation rates ranging from 20 to 40 per cent, depending on the period. The concluding section discusses the possible reasons for this funding.
|Date of creation:||Oct 2007|
|Publication status:||published as Bronwyn H. HALL, 2005. "Measuring the Returns to R&D: the Depreciation Problem," Annales d'Economie et de Statistique, ENSAE, issue 79-80, pages 341-381.|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
Web page: http://www.nber.org
More information through EDIRC
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.:
- Ivar Ekeland & James Heckman & Lars Nesheim, 2002.
"Identification and estimation of hedonic models,"
CeMMAP working papers
CWP07/02, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
- Ivar Ekeland & James J. Heckman & Lars P. Nesheim, 2003. "Identification and Estimation of Hedonic Models," NBER Working Papers 9910, National Bureau of Economic Research, Inc.
- Ekeland, Ivar & Heckman, James J. & Nesheim, Lars, 2003. "Identification and Estimation of Hedonic Models," IZA Discussion Papers 853, Institute for the Study of Labor (IZA).
- Ivar Ekeland & James J. Heckman & Lars Nesheim, 2003. "Identification and Estimation of Hedonic Models," CESifo Working Paper Series 1031, CESifo Group Munich.
- Zvi Griliches & Jacques Mairesse, 1995.
"Production Functions: The Search for Identification,"
Harvard Institute of Economic Research Working Papers
1719, Harvard - Institute of Economic Research.
- Z, Griliches & Jacques Mairesse, 1997. "Production Functions : The Search for Identification," Working Papers 97-30, Centre de Recherche en Economie et Statistique.
- Zvi Griliches & Jacques Mairesse, 1995. "Production Functions: The Search for Identification," NBER Working Papers 5067, National Bureau of Economic Research, Inc.
- Cockburn, Iain & Griliches, Zvi, 1988.
"Industry Effects and Appropriability Measures in the Stock Market's Valuation of R&D and Patents,"
American Economic Review,
American Economic Association, vol. 78(2), pages 419-23, May.
- Iain Cockburn & Zvi Griliches, 1987. "Industry Effects and Appropriability Measures in the Stock Markets Valuation of R&D and Patents," NBER Working Papers 2465, National Bureau of Economic Research, Inc.
- Brown, James N & Rosen, Harvey S, 1982.
"On the Estimation of Structural Hedonic Price Models,"
Econometric Society, vol. 50(3), pages 765-68, May.
- James N. Brown & Harvey S. Rosen, 1982. "On the Estimation of Structural Hedonic Price Models," NBER Technical Working Papers 0018, National Bureau of Economic Research, Inc.
- Zvi Griliches, 1980.
"Returns to Research and Development Expenditures in the Private Sector,"
in: New Developments in Productivity Measurement, pages 419-462
National Bureau of Economic Research, Inc.
- Zvi Griliches, 1998. "Returns to Research and Development Expenditures in the Private Sector," NBER Chapters, in: R&D and Productivity: The Econometric Evidence, pages 49-81 National Bureau of Economic Research, Inc.
- Zvi Griliches & Bronwyn H. Hall & Ariel Pakes, 1988. "R&D, Patents, and Market Value Revisited: Is There Evidence of A SecondTechnological Opportunity Related Factor?," NBER Working Papers 2624, National Bureau of Economic Research, Inc.
- Griliches, Zvi, 1981.
"Market value, R&D, and patents,"
Elsevier, vol. 7(2), pages 183-187.
- Chan, Su Han & Martin, John D. & Kensinger, John W., 1990. "Corporate research and development expenditures and share value," Journal of Financial Economics, Elsevier, vol. 26(2), pages 255-276, August.
- repec:crs:wpaper:9730 is not listed on IDEAS
- 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.
- Bosworth, Derek & Rogers, Mark, 2001. "Market Value, R&D and Intellectual Property: An Empirical Analysis of Large Australian Firms," The Economic Record, The Economic Society of Australia, vol. 77(239), pages 323-37, December.
- 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.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:13473. 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: ()
If references are entirely missing, you can add them using this form.