Measuring the Returns to R&D: The Depreciation Problem

Bronwyn Hall

No 13473, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Measuring the private returns to R&D requires knowledge of its private depreciation or obsolescence rate, which is inherently variable and responds to competitive pressure. Nevertheless, most of the previous literature has used a constant depreciation rate to construct R&D capital stocks and measure the returns to R&D, a rate usually equal to 15 per cent. In this paper I review the implications of this assumption for the measurement of returns using two different methodologies: one based on the production function and another that uses firm market value to infer returns. Under the assumption that firms choose their R&D investment optimally, that is, marginal expected benefit equals marginal cost, I show that both estimates of returns can be inverted to derive an implied depreciation rate for R&D capital. I then test these ideas on a large unbalanced panel of U.S. manufacturing firms for the years 1974 to 2003. The two methods do not agree, in that the production function approach suggests depreciation rates near zero (or even appreciation) whereas the market value approach implies depreciation rates ranging from 20 to 40 per cent, depending on the period. The concluding section discusses the possible reasons for this funding.

JEL-codes: D24 G12 L20 O30 (search for similar items in EconPapers)
Date: 2007-10
New Economics Papers: this item is included in nep-ino, nep-knm, nep-mic and nep-tid
Note: IO PR
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (96)

Published as Bronwyn H. HALL, 2005. "Measuring the Returns to R&D: the Depreciation Problem," Annales d'Economie et de Statistique, ENSAE, issue 79-80, pages 341-381.
Published as Measuring the Returns to R&D: The Depreciation Problem , Bronwyn H. Hall. in Contributions in Memory of Zvi Griliches , Mairesse and Trajtenberg. 2010

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Chapter: Measuring the Returns to R&D: The Depreciation Problem (2010)
Journal Article: Measuring the Returns to R&D: the Depreciation Problem (2005)
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