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Firms’ R&D Dilemma: To Undertake Or Not To Undertake R&D

  • Xulia González
  • Consuelo Pazó

It is well known that in most industries a significant proportion of firms do not perform innovative activities. Although empirical studies on the determinants of R&D often have taken this fact into account by considering the dependent variable as a censured one, there is not an explicit theoretical model to explain the zeros. The concern of this letter is to discuss a simple theoretical model where firms simultaneously decide whether to undertake or not R&D activities jointly with the l evel of the R&D investment. We show that a firm performs R&D activities only when its optimal level of R&D expenditure is higher than a threshold. Additionally, we show that both the probability of undertaking R&D activities and the R&D expenditure increase with market power, with the elasticity of demand with respect to quality and with the elasticity of quality with respect to R&D. Finally, from this simple theoretical framework we discuss a suitable econometric model that threats these decisions simultaneously.

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Paper provided by Universidade de Vigo, Departamento de Economía Aplicada in its series Working Papers with number 0208.

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Length: 11 pages
Date of creation: Oct 2002
Date of revision:
Handle: RePEc:vig:wpaper:0208
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  1. Polinsky, A. Mitchell & Shavell, Steven, 2001. "Corruption and optimal law enforcement," Journal of Public Economics, Elsevier, vol. 81(1), pages 1-24, July.
  2. Bruno Crépon & Emmanuel Duguet & Jacques Mairesse, 1998. "Research, Innovation and Productivity : An Econometric Analysis at the Firm Level," Working Papers 98-33, Centre de Recherche en Economie et Statistique.
  3. Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS) 64, University of Warwick, Department of Economics.
  4. Cohen, Wesley M & Klepper, Steven, 1996. "A Reprise of Size and R&D," Economic Journal, Royal Economic Society, vol. 106(437), pages 925-51, July.
  5. repec:fth:inseep:9833 is not listed on IDEAS
  6. Zvi Griliches, 1990. "Patent Statistics as Economic Indicators: A Survey," NBER Working Papers 3301, National Bureau of Economic Research, Inc.
  7. Maria Laura Parisi & Alessandro Sembenelli, 2001. "Is Private R&D Spending Sensitive to Its Price? Empirical Evidence on Panel Data for Italy," Boston College Working Papers in Economics 493, Boston College Department of Economics.
  8. Nelson, Forrest D., 1977. "Censored regression models with unobserved, stochastic censoring thresholds," Journal of Econometrics, Elsevier, vol. 6(3), pages 309-327, November.
  9. repec:fth:harver:1473 is not listed on IDEAS
  10. Cohen, Wesley M & Klepper, Steven, 1992. "The Anatomy of Industry R&D Intensity Distributions," American Economic Review, American Economic Association, vol. 82(4), pages 773-99, September.
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