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The Shape of Production Functions and the Direction of Technical Change

Quarterly Journal of Economics 2005 120(2), 517-549
This paper views the standard production function in macroeconomics as a reduced form and derives its properties from microfoundations. The shape of this production function is governed by the distribution of ideas. If that distribution is Pareto, then two results obtain: the global production function is Cobb-Douglas, and technical change in the long run is labor-augmenting. Kortum showed that Pareto distributions are necessary if search-based idea models are to exhibit steady-state growth. Here we show that this same assumption delivers the additional results about the shape of the production function and the direction of technical change

Measuring the Social Return to R&D

Quarterly Journal of Economics 1998 113(4), 1119-1135
Is there too much or too little research and development (R&D)? In this paper we bridge the gap between the recent growth literature and the empirical productivity literature. We derive in a growth model the relationship between the social rate of return to R&D and the coefficient estimates of the empirical literature and show that these estimates represent a lower bound. Furthermore, our analytic framework provides a direct mapping from the rate of return to the degree of underinvestment in research. Conservative estimates suggest that optimal R&D investment is at least two to four times actual investment.

Mutual fund performance with learning across funds

Journal of Financial Economics 2005 78(3), 507-552
The average level and cross-sectional variability of fund alphas are estimated from a large sample of mutual funds. This information is incorporated, along with the usual regression estimate of alpha, in a (roughly) precision-weighted average measure of individual fund performance. Substantial “learning across funds” is documented, with significant effects on investment decisions. In a Bayesian framework, this form of learning is inconsistent with the assumption, made in the past literature, of prior independence across funds. Independence can be viewed as an extreme scenario in which the true cross-sectional distribution of alphas is presumed to be known a priori.