Production Networks and R&D Allocation

Yasutaka Koike-Mori and Koki Okumura

No E-2025-01, TDB-CAREE Discussion Paper Series from Teikoku Databank Center for Advanced Empirical Research on Enterprise and Economy, Graduate School of Economics, Hitotsubashi University

Abstract: This paper investigates how production networks shape firms’ R&D decisions and the resulting aggregate inefficiencies. We develop a dynamic model in which firms form supply chains through a persistent matching process and rely on those links to trade both existing products and newly developed products from R&D. The model features two sources of misallocation: market-power distortions and a network-formation externality. The second novel externality leads firms to fail to internalize that their R&D makes them more attractive to potential partners. We estimate the model using Japanese firm-to-firm transaction and patent data and show that the first-best allocation lies close to the decentralized outcome. Market-power corrections raise R&D incentives for older firms by relieving double marginalization along their long supply chains. Instead, internalizing the network-formation externality tilts R&D toward younger firms that expand their supply chains rapidly. These opposing forces largely offset each other, leaving the planner’s allocation near the decentralized one.

Pages: 54 pages
Date: 2025-10
New Economics Papers: this item is included in nep-bec, nep-com, nep-ind, nep-ino, nep-sea and nep-tid
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Persistent link: https://EconPapers.repec.org/RePEc:hit:tdbcdp:e-2025-01

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