Working Paper

R&D Capital and the Idea Production Function

Abstract: We supplement the “Idea Production Function” (IPF), whereby research and development (R&D) activity leads to growth, with measures of R&D capital. We construct the R&D capital stock in the United States and estimate the IPF with patent applications as R&D output, allowing for a flexible treatment of R&D productivity (over 1968–2019). The estimated substitution elasticity between R&D inputs is 0.7−0.8, which suggests that R&D capital is an essential factor in producing ideas and complementary to R&D labor. We identify a positive trend in R&D labor productivity (roughly 1 percent) and a cyclical variation of R&D capital productivity. Rather than “ideas getting harder to find,” the R&D capital needed to find them has become scarce.

Keywords: macroeconomics; Idea Production Function (IPF); R&D capital;

JEL Classification: O30; O40; O47;

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Bibliographic Information

Provider: Federal Reserve Bank of Kansas City

Part of Series: Research Working Paper

Publication Date: 2023-05-11

Number: RWP 23-05