Measuring the Private Economic Benefits of R&D

Abstract

The duration and magnitude of the private economic benefits obtained from firm-level R&D outlays are important to managers, investors and policy-makers. We present a modeling and estimation approach that facilitates reliable estimation of these benefits under mild a priori assumptions. Our estimates of R&D useful life and realized returns shed light on three important debates in the literature: Do firms invest optimally in R&D? Do investors entertain rational expectations about firm-level R&D benefits? Has the cost of R&D capital declined over time? We answer each of these questions in the affirmative. Further, our evidence indicates that conventional measures of R&D capital stock are grossly overstated.

Keywords: R&D, private returns, useful life, depreciation, capital stocks, lag structure, autocorrelation, investor expectations, cost of capital

JEL Classification: C23, D01, D22, D24, G31, L23, M11, M41, O32