Too Much of a Good Thing? the Economics of Investment in R&D

31 Pages Posted: 19 Oct 1995 Last revised: 13 Oct 2013

See all articles by Charles I. Jones

Charles I. Jones

Stanford Graduate School of Business; National Bureau of Economic Research (NBER)

John C. Williams

Federal Reserve Bank of New York

Date Written: August 1999

Abstract

Research and development (R&D) is a key determinant of long run productivity and welfare. A central issue is whether a decentralized economy undertakes too little or too much R&D. We develop an endogenous growth model that incorporates parametrically four important distortions to R&D: the surplus appropriability problem, knowledge spillovers, creative destruction, and congestion externalities. We show that our model is consistent with the available evidence on R&D, growth, and markups. Calibrating the model to micro and macro data, we find that the decentralized economy typically underinvests in R&D relative to what is socially optimal. The only exceptions to this conclusion occur when both the congestion externality is extremely strong and the equilibrium real interest rate is very high. These results are robust to reasonable variations in model parameters.

Suggested Citation

Jones, Charles I. and Williams, John C., Too Much of a Good Thing? the Economics of Investment in R&D (August 1999). NBER Working Paper No. w7283. Available at SSRN: https://ssrn.com/abstract=3347

Charles I. Jones (Contact Author)

Stanford Graduate School of Business ( email )

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HOME PAGE: http://www.stanford.edu/~chadj

National Bureau of Economic Research (NBER)

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John C. Williams

Federal Reserve Bank of New York ( email )

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New York, NY 10045
United States

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