R&D and productivity: Estimating production functions when productivity is endogenous

Doraszelski, Ulrich and Jaumandreu, Jordi (2006): R&D and productivity: Estimating production functions when productivity is endogenous.

Abstract

We develop a simple estimator for production functions in the presence of endogenous productivity change that allows us to retrieve productivity and its relationship with R&D at the firm level. Our dynamic investment model can be viewed as a generalization of the knowledge capital model (Griliches 1979) that has remained a cornerstone of the productivity literature for more than 25 years. We relax the assumptions on the R&D process and examine the impact of the investment in knowledge on the productivity of firms. We illustrate our approach on an unbalanced panel of more than 1800 Spanish man- ufacturing firms in nine industries during the 1990s. Our ¯ndings indicate that the link between R&D and productivity is subject to a high degree of uncertainty, nonlinearity, and heterogeneity across firms. Abstracting from uncertainty and nonlinearity, as is done in the knowledge capital model, or assuming an exogenous process for productiv- ity, as is done in the recent literature on structural estimation of production functions, overlooks some of its most interesting features.

• Item Type: MPRA Paper
• Institution: Universidad Carlos III, Harvard University
• Language: English
• Keywords: production function; knowledge capital; productivity; R&D
• Subjects: O - Economic Development, Innovation, Technological Change, and Growth > O3 - Innovation ; Research and Development ; Technological Change ; Intellectual Property Rights