R&D And Productivity: Estimating Production Functions When Productivity Is Endogenous

A simple estimator for production functions in the presence of endogenous productivity change that allows retrieving productivity and its relationship with R&D (Research & Development) at the firm level is developed. Dynamic investment model can be viewed as a generalization of the knowledge capital model that has remained a cornerstone of the productivity literature for more than 25 years. This paper relaxes the assumptions on the R&D process and examines the impact of the investment in knowledge on the productivity of firms. The findings indicate that the link between R&D and productivity is subject to a high degree of uncertainty, nonlinearity, and heterogeneity across firms.