Measuring the Social Return to R&D

Measuring the Social Return to R&D

February 1997 | Charles I. Jones and John C. Williams
The paper by Charles I. Jones and John C. Williams explores the social return to research and development (R&D) and challenges the empirical literature's estimates of the rate of return to R&D, which range from 30% to over 100%. The authors derive analytically the relationship between the social rate of return to R&D and the coefficient estimates from empirical studies. They show that these estimates are a lower bound on the true social rate of return. Using a conservative estimate of a 30% rate of return, they find that optimal R&D investment is at least four times larger than actual investment. The paper also discusses the limitations of the empirical productivity literature, which often treats R&D as a form of capital investment, ignoring distortions such as monopoly pricing, intertemporal knowledge spillovers, and creative destruction. The authors provide a methodological contribution by showing how to compute social rates of return and demonstrate that market distortions affect resource allocation but not the functional relationship between the social rate of return and the share of resources devoted to R&D. They conclude that the empirical literature's estimates of the rate of return to R&D are robust and suggest substantial underinvestment in R&D by advanced economies.The paper by Charles I. Jones and John C. Williams explores the social return to research and development (R&D) and challenges the empirical literature's estimates of the rate of return to R&D, which range from 30% to over 100%. The authors derive analytically the relationship between the social rate of return to R&D and the coefficient estimates from empirical studies. They show that these estimates are a lower bound on the true social rate of return. Using a conservative estimate of a 30% rate of return, they find that optimal R&D investment is at least four times larger than actual investment. The paper also discusses the limitations of the empirical productivity literature, which often treats R&D as a form of capital investment, ignoring distortions such as monopoly pricing, intertemporal knowledge spillovers, and creative destruction. The authors provide a methodological contribution by showing how to compute social rates of return and demonstrate that market distortions affect resource allocation but not the functional relationship between the social rate of return and the share of resources devoted to R&D. They conclude that the empirical literature's estimates of the rate of return to R&D are robust and suggest substantial underinvestment in R&D by advanced economies.
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