Firm's R&D Behavior Under Rational Expectations
This paper formulates dynamic R\&D investment decisions of private firms as an optimal stochastic control problem. It derives explicitly R\&D investment decision rule and the cross equations parameter restrictions imposed by the rational expectations hypothesis, using the Riccati equations only and not requiring the use of Wiener-Kolmogorov prediction formula. Identification and estimation of the structural parameters are essential for evaluating policies such as R\&D subsidies, firm size, market concentration so that the evaluations of these policies stand against Lucas critique. We find conditions under which the structural parameters are identified; we then discuss econometric procedures for using aggregate time series data or panel data on firms to deal with unobserved technological knowledge, to estimate the structural parameters, and to test the model.
|Date of creation:||30 May 1997|
|Note:||Type of Document - postscript; prepared on IBM PC - PC-TEX; to print on PostScript; pages: 22 ; figures: no-figures. For comments and reference.|
|Contact details of provider:|| Web page: http://econwpa.repec.org|
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- Rosenberg, Joel B, 1976. "Research and Market Share: A Reappraisal of the Schumpeter Hypothesis," Journal of Industrial Economics, Wiley Blackwell, vol. 25(2), pages 101-112, December.
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- Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
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