A Structural Empirical Model of R&D Investment, Firm Heterogeneity, and Industry Evolution

This paper develops and estimates an industry equilibrium model of manufacturing plants in the Korean electric motor industry from 1991 to 1996. Plant-level decisions on R&D, physical capital investment, entry, and exit are integrated in a dynamic setting with knowledge spillovers. We use a simu...

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Bibliographic Details
Published inNBER Working Paper Series
Main Authors Chen, Yanyou, Xu, Daniel
Format Paper
LanguageEnglish
Published Cambridge National Bureau of Economic Research, Inc 01.02.2022
Subjects
Economic theory
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Summary:This paper develops and estimates an industry equilibrium model of manufacturing plants in the Korean electric motor industry from 1991 to 1996. Plant-level decisions on R&D, physical capital investment, entry, and exit are integrated in a dynamic setting with knowledge spillovers. We use a simulated method of moments estimator and the novel approximation method of Weintraub, Benkard and Van Roy (2008) to estimate the R&D cost, magnitude of knowledge spillovers, adjustment costs of physical investment, and plant scrap value distribution. Knowledge spillovers are essential to explaining the firm-level productivity evolution and the equilibrium market configuration. A counterfactual experiment reveals that a 15% R&D subsidy maximizes industry output and is broadly consistent with a past policy initiative of the Korean government.
ISSN:0898-2937
DOI:10.3386/w29733