A new perspective on underinvestment in agricultural R&D

this document for non-commercial purposes by any means, provided that this copyright notice appears on all such copies. ii During the past 40 years, the returns to agricultural R&D have been on average in the range of 40-60 % (Alston, et al 2000, Evenson 2001). Many agricultural economists see this high average as convincing evidence that there is significant underinvestment in public agricultural R&D (Ruttan 1980, Pinstrup-Andersen 2001). This paper sheds new light on the underinvestment hypothesis by introducing a simple model of the selection of R&D projects and confronting it with the rate-of-return evidence accumulated over the years worldwide. The model assumes that the distribution of all possible R&D projects on an expected rate-of-return (ERR) scale declines asymptotically. Under the neoclassical conditions of full information and profit maximization, R&D project selection starts with the project with the highest ERR and continues until the budget is finished or the last project hits the social cutoff rate, whichever comes first. Hence the underinvestment gap can be defined as the difference between the ERR of th