Cost-Reducing and Demand-Creating R&D With Spillovers

Abstract

This paper analyzes R&D policies when the returns to cost-reducing and demand-creating R&D are imperfectly appropriable and market structure is endogenous.Previous characterizations of appropriability are generalized to permit the possibility that own and rival R&D are imperfect substitutes.We also describe how.equilibrium expenditures on process and product R&D, as well as equilibrium market structure, depend on technologicalopportunities and spillovers.In contrast to previous work, diminished appropriability does not necessarily reduce R&D expenditures.For example, under some conditions, an increase in the extent of process (product) spillovers will lead to an increase in product (process) R&D.We estimate several variants of the model using manufacturing line of business data and data from a survey of R&D executives.

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Affiliated Institutions

• National Bureau of Economic Research US
• Stanford University US
• Yale University US

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