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.
File(s): File format is text/html http://www.federalreserve.gov/pubs/feds/2008/200852/200852abs.html
File(s): File format is application/pdf http://www.federalreserve.gov/pubs/feds/2008/200852/200852pap.pdf
Part of Series: Finance and Economics Discussion Series
Publication Date: 2008