Innovation and Welfare: Results from Joint Estimation of Production and Demand Functions

33 Pages Posted: 26 Jul 2010 Last revised: 29 Jul 2010

See all articles by Jordi Jaumandreu

Jordi Jaumandreu

Boston University

Jacques Mairesse

National Institute of Statistics and Economic Studies (INSEE) - Center for Research in Economics and Statistics (CREST); Maastricht University - United Nations and Maastricht Economic Research Institute on Innovation and Technology (UNU-MERIT); National Bureau of Economic Research (NBER)

Date Written: July 2010

Abstract

This paper develops a simple framework to estimate the parameters of the production function together with the elasticity of the demand for the output and the impact of demand and cost shifters. The use of this framework helps, in the first place, to treat successfully the difficult problem of the endogeneity of input quantities. But it also provides a natural way to assess the welfare effects of firms' innovative actions by estimating their impact on both cost and demand. We show that the total current period (static) welfare gains of introducing a process or a product innovation are, on average, about 1.6% and 4%, respectively, of the value of the firm's current sales. The increase in consumer surplus amounts to two- thirds of these gains in the first case and half in the second.

Suggested Citation

Jaumandreu, Jordi and Mairesse, Jacques, Innovation and Welfare: Results from Joint Estimation of Production and Demand Functions (July 2010). NBER Working Paper No. w16221. Available at SSRN: https://ssrn.com/abstract=1648021

Jacques Mairesse

National Institute of Statistics and Economic Studies (INSEE) - Center for Research in Economics and Statistics (CREST) ( email )

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Malakoff Cedex, 1 92245
France

Maastricht University - United Nations and Maastricht Economic Research Institute on Innovation and Technology (UNU-MERIT)

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6211 TC Maastricht
Netherlands

National Bureau of Economic Research (NBER)

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United States

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