Business Economics and Public Policy Papers

Document Type

Journal Article

Date of this Version

2-2013

Publication Source

Review of Economic Studies

Volume

80

Issue

4

Start Page

1338

Last Page

1383

DOI

10.1093/restud/rdt011

Abstract

We develop a model of endogenous productivity change to examine the impact of the investment in knowledge on the productivity of firms. Our dynamic investment model extends the tradition of the knowledge capital model of Griliches (1979) that has remained a cornerstone of the productivity literature. Rather than constructing a stock of knowledge capital from a firm’s observed R&D expenditures, we consider productivity to be unobservable to the econometrician. Our approach accounts for uncertainty, nonlinearity, and heterogeneity across firms in the link between R&D and productivity. We also derive a novel estimator for production functions in this setting.

Using an unbalanced panel of more than 1800 Spanish manufacturing firms in nine industries during the 1990s, we provide evidence of nonlinearities as well as economically significant uncertainties in the R&D process. R&D expenditures play a key role in determining the differences in productivity across firms and the evolution of firm-level productivity over time.

Keywords

R&D, productivity, knowledge capital model

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Economics Commons

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Date Posted: 27 November 2017

This document has been peer reviewed.