A Note on the Social Returns to Private Research and Development

Abstract

The seminal work of Schultz and Griliches (1958, 1964), along with more recent efforts by Ayer and Schuh, Evenson (1967, 1974), Peterson (1967, 1971), Schmitz and Seckler, and others, have shown that investment agricultural has yielded a high social return. Although private investment agriculturally related and development (R&D) has been taken into account many of these studies by adding rough estimates of private to expenditures, there is virtually no independent information on social returns of private R&D relating to agriculture. (This is probably due to a lack of data on private R& D.) It is certain that expected private rate of return to this investment is at least as great as expected private rate of return to alternative investments, else it would not be carried out. But is social return to private R&D high enough to justify this investment from society's point of view? I shall argue this note that spite of lack of empirical evidence on social returns to private R&D, we can be assured that, as long as R&D is privately profitable, it is also socially profitable. The key to argument is excess of social over private returns. This is not to say that private investment decisions will result a socially optimum level of R&D, particularly basic research. It is recognized that because of public goods nature of information generated by basic research, most of this work has to be publicly funded. As Nelson points out, the fact that industry laboratories do basic at all is itself evidence that we should increase our expenditure on basic research (p. 304). Hirshleifer takes a somewhat different view, arguing that there may be overinvestment private information-gathering activities if information remains private in sense of being purely redistributive, not leading to any productive arrangements (p. 573). However, case of farm-supply industry, it will now be argued that private R&D yields a private return only if it results an improvement productive arrangements, i.e., yields a social return by increasing agricultural output. Private and Social Returns Defined