Abstract
The objective of this paper is to investigate, within the framework of a two-sector investment model, the effect of dramatic changes in relative market opportunities on the relative amount of R & D invested in different types of projects. In particular, we formulate and estimate a simple model of the share of aggregate US industrial R & D devoted to ‘energy R & R’, as a function of two determinants of relative market opportunities: the real (or relative) price of energy, and the defence share of gross national product (GNP). During the period under consideration (1972–1983), there were sharp, abrupt, exogenous movements in both of these variables, which, our analysis indicates, jointly account for most of the variation in the allocation of R & D investment. Separate estimates of the response of privately and federally sponsored R & D investment are obtained.
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