Investment in R&D, Costs of Adjustment and Expectations

42 Pages Posted: 8 Jun 2004 Last revised: 20 Jul 2010

See all articles by Mark A. Schankerman

Mark A. Schankerman

London School of Economics and Political Science; Centre for Economic Policy Research (CEPR)

M. Ishaq Nadiri

New York University (NYU) - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: July 1982

Abstract

This paper proposes a framework which integrates convex costs of adjustment and expectations formation in the determination of investment decisions in R&D at the firm level. The model is based on cost minimization subject to the firm's expectations of the stream of output and the price of R&D, and results in equations for actual and multiple-span planned investment in R&D and for the realization error as functions of these expectations. The model accommodates alternative mechanisms of expectations formation and provides a methodology for testing these hypotheses empirically. We derive estimable equations and testable parameter restrictions for the rational, adaptive and static expectations hypotheses. The empirical results using pooled firm data strongly reject the rational and static expectations hypotheses and generally support adaptive expectations.

Suggested Citation

Schankerman, Mark A. and Nadiri, M. Ishaq, Investment in R&D, Costs of Adjustment and Expectations (July 1982). NBER Working Paper No. w0931. Available at SSRN: https://ssrn.com/abstract=226914

Mark A. Schankerman (Contact Author)

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Centre for Economic Policy Research (CEPR) ( email )

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M. Ishaq Nadiri

New York University (NYU) - Department of Economics ( email )

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