Measuring the Price of Research and Development Output

This paper develops a framework for constructing an R&D output price index. Based on a model of the innovator, we show that the price of innovation is equal to the expected discounted stream of profits attributable to the adoption of the innovation. Using this relationship, we construct an R&D output price index using data on NAICS 5417, Scientific R&D services. We compute that R&D output prices increased, on average, by 5.8 percent at an annual rate from 1987 to 2005. Using our price index, we deflate nominal Scientific R&D services revenues and find that real Scientific R&D services revenues grew at an average rate of 2.6 percent. Finally, we propose deflating total R&D nominal expenditures with two price indexes; use our output-based price index for the portion of total R&D expenditures from NAICS 5417 and an aggregate input-cost price index for the remainder of R&D expenditures. Under this strategy we find that real total R&D expenditures grew at an average annual rate of 1.4 percent. Only using an aggregate input-cost price index understates R&D price growth for NAICS 5417. This boosts the real growth of total R&D expenditures over our time horizon, leading to substantial mis-measurement of total R&D expenditures.