Abstract
This study presents a model in which firms invest in R&D to generate innovations that increase their underlying profitability and invest in physical capital to produce output. Estimating the model using a method of moments approach reveals that R&D expenditures contribute significantly to profits and firm value. The model also captures variation in R&D intensity, profits and firm value across R&D-intensive industries. Counterfactual experiments suggest that changes in distribution of firms in the economy may, over the long-run, mitigate tax policy changes designed to encourage R&D expenditures.
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