Firm's R & D Behavior Under Rational Expectations

Lakshmi Raut ()

Indian Economic Review, 2005, vol. 40, issue 2, 127-144

Abstract: This paper formulates the inter-temporal R&D investment decision problem of private firms using an optimal stochastic control framework. The paper explicitly derives the R&D investment decision rule and the cross equations parameter restrictions imposed by the hypothesis of rational expectations, using only the Riccati equation, and not requiring the Wiener-Kolmogorov prediction formula. Identification and estimation of the structural parameters are essential for evaluating policies to be free from Lucas critique. The paper finds conditions for identification of structural parameters, and discusses econometric procedures for estimation of structural parameters, and testing of the model.

Keywords: Research and development; rational expectations; stochastic control; Lucas Critique. (search for similar items in EconPapers)
JEL-codes: D21 L1 (search for similar items in EconPapers)
Date: 2005
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Working Paper: Firm's R & D Behavior Under Rational Expectations (1997)
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