Quantitative Economics: Jul, 2015, Volume 6, Issue 2

Research and development, profits, and firm value: A structural estimation

Missaka Warusawitharana

This study presents a model in which firms invest in research and development (R&D) to generate innovations that increase their underlying profitability and invest in physical capital to produce output. Estimating the model using a method of moments approach reveals that R&D expenditures contribute significantly to profits and firm value. The model also captures variation in R&D intensity, profits, and firm value across R&D‐intensive industries. Counterfactual experiments suggest that changes in the distribution of firms in the economy may, over the long run, mitigate tax policy changes designed to encourage R&D expenditures.

Research and development structural estimation firm dynamics policy evaluation D22 O3

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