Working Paper

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

Abstract: 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.

Keywords: Research and development; Rate of return;

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 2008

Number: 2008-52