Finance and Economics Discussion Series (FEDS)
October 2008
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.
Full paper (Screen Reader Version)Keywords: Research and development, structural estimation
PDF: Full Paper
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