Did R&D Misallocation Contribute to Slower Growth?
Abstract
This paper provides evidence that declining allocative efficiency in the R&D sector contributed to the recent slowdown in US productivity growth. I develop a growth accounting framework with rich firm heterogeneity including frictions, which are captured by a wedge between the marginal cost and benefits of R&D. The model growth rate depends on a summary statistic for allocative efficiency in the R&D sector, which is decreasing R&D wedge dispersion. I show that R&D wedges can be measured from R&D returns—the ratio of the value created from R&D to its cost—and measure them for US-listed firms for 1975–2014. I document large and persistent differences in R&D returns and present evidence suggesting financial frictions, adjustment costs, and monopsony power as drivers. Combining data and model, I estimate that frictions reduced economic growth by 18% and that declining allocative efficiency can account for 30% of the observed growth slowdown.
