The owner of a firm investing in R&D doesn’t account for all the benefits their technology might bring to non-paying consumers and firms, but they do care about the benefits that R&D will bring to the firm long into the future, even after their death. One part of this is that owners don’t face term limits that incentivize pump-and-dump attempts to garner voter support.
This does not match my expectations, even if it agrees with how I would feel were I the owner.
For example, the top ten Nasdaq companies spent ~$222B between them on R&D, which is almost half of the $463B spend from the private sector.
But I notice these are publicly traded companies, where the owner is in fact the shareholders. The average holding period for stocks is less than a year; if memory serves in 2020 it was less than 6 months. The average shareholder definitely does not care about the value of R&D to the firm long after their deaths, or I suspect any time at all after they sell the stock.
I notice that Amazon and Tesla are both on the list, and maybe by owner we really mean founder; I could easily see Bezos and Musk feeling that way about R&D at their companies. But most of R&D spend from the private sector is not from founder-run companies; it is from professionally managed companies with hired CEOs and executives.
On that note, I feel like I have seen plenty of cases where executives and CEOs do precisely the pump-and-dump phenomenon on the project side. Maybe executives have longer tenures than legislators, so it makes more sense for them to take a longer view? Yet when I check, CEOs have on average shorter tenure than Congress does: the CEO has 7.2 years; Representatives and Senators have 8.9 and 11 years respectively. I also note that the CEO has much more power over the budget than legislators do; the legislator at least requires the agreement or indifference of a majority of the legislature to get R&D stuff added, whereas the CEO can very often decide budget priorities unilaterally.
That being said, this doesn’t seem to change the overall thrust of the post. My suspicion lands on the 2% captured value number as being misleading; for the individual company, 2% of a huge number can easily be more than 98% of a much smaller number. I’m also curious about how that number 2% is built, so my next step here is to check out the Nordhaus paper more deeply.
“The average shareholder definitely does not care about the value of R&D to the firm long after their deaths, or I suspect any time at all after they sell the stock.”
This was addressed in the post: the price of the stock today (when its being sold) is a prediction of its future value. Even if you only care about the price that you can sell it at today, that means that you care about at least the things that can lead to predictably greater value in the future, including R&D, because the person you’re selling to cares about those things.
Also worth noting: the reason that the 2% value is meaningful is that if firms captured 100% of the value, they would be incentivized to increase the amount produced such that the amount they create would be maximally efficient. When they only capture 2% of the value, they are no longer incentivized to create the maximally efficient amount (stop producing it when cost to produce = value produced). This is basically why externalities lead to market inefficiencies. The issue isn’t that they won’t produce it at all, it’s that they will underproduce it.
This does not match my expectations, even if it agrees with how I would feel were I the owner.
For example, the top ten Nasdaq companies spent ~$222B between them on R&D, which is almost half of the $463B spend from the private sector.
But I notice these are publicly traded companies, where the owner is in fact the shareholders. The average holding period for stocks is less than a year; if memory serves in 2020 it was less than 6 months. The average shareholder definitely does not care about the value of R&D to the firm long after their deaths, or I suspect any time at all after they sell the stock.
I notice that Amazon and Tesla are both on the list, and maybe by owner we really mean founder; I could easily see Bezos and Musk feeling that way about R&D at their companies. But most of R&D spend from the private sector is not from founder-run companies; it is from professionally managed companies with hired CEOs and executives.
On that note, I feel like I have seen plenty of cases where executives and CEOs do precisely the pump-and-dump phenomenon on the project side. Maybe executives have longer tenures than legislators, so it makes more sense for them to take a longer view? Yet when I check, CEOs have on average shorter tenure than Congress does: the CEO has 7.2 years; Representatives and Senators have 8.9 and 11 years respectively. I also note that the CEO has much more power over the budget than legislators do; the legislator at least requires the agreement or indifference of a majority of the legislature to get R&D stuff added, whereas the CEO can very often decide budget priorities unilaterally.
That being said, this doesn’t seem to change the overall thrust of the post. My suspicion lands on the 2% captured value number as being misleading; for the individual company, 2% of a huge number can easily be more than 98% of a much smaller number. I’m also curious about how that number 2% is built, so my next step here is to check out the Nordhaus paper more deeply.
“The average shareholder definitely does not care about the value of R&D to the firm long after their deaths, or I suspect any time at all after they sell the stock.”
This was addressed in the post: the price of the stock today (when its being sold) is a prediction of its future value. Even if you only care about the price that you can sell it at today, that means that you care about at least the things that can lead to predictably greater value in the future, including R&D, because the person you’re selling to cares about those things.
Also worth noting: the reason that the 2% value is meaningful is that if firms captured 100% of the value, they would be incentivized to increase the amount produced such that the amount they create would be maximally efficient. When they only capture 2% of the value, they are no longer incentivized to create the maximally efficient amount (stop producing it when cost to produce = value produced). This is basically why externalities lead to market inefficiencies. The issue isn’t that they won’t produce it at all, it’s that they will underproduce it.