Griliches JPE 1958

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Research Costs and Social Returns: Hybrid Corn and Related InnovationsAuthor(s): Zvi GrilichesSource: The Journal of Political Economy, Vol. 66, No. 5 (Oct., 1958), pp. 419-431Published by: The University of Chicago PressStable URL: http://www.jstor.org/stable/1826669

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RESEARCH COSTS AND SOCIAL RETURNS: HYBRIDCORN AND ]RELATED INNOVATIONS1ZVI GRILICHESUniversityfChicago

INTRODUCTION AND SUMMARYBOTH private nd public xpendi-tures on "research and develop-ment" have grown very rapidlyin the last decade. Quantitatively,how-ever, we know very littleabout the re-sultsofthese nvestments.We have someidea of how much we have spent butvery little of what we got in return.We know almostnothing bout the real-ized rate of return n these nvestments,thoughwe feel intuitively hat it musthave been quite high. This article pre-sentsa first teptoward nswering omeof these questions. However, all thatis attemptedhere s to estimate he real-ized social rate of return,as of 1955,on public and private funds investedin hybrid-cornesearch,one of the out-standingtechnological uccesses of thecentury.The calculated rate of returnis an estimate, ubject to a wide marginof error,but it should provide us withan order of magnitudefor the "true"social rate of returnon expenditures nhybrid-corn esearch.Actually, believethat my estimate is biased downward1for,whenever I had to choose amongalternative ssumptions, chose the as-sumption hat ed to the owest stimate.

I This article s an outgrowth f a larger tudyof the economicsof hybridcorn. See my article,"Hybrid Corn: An Exploration n the Economicsof TechnologicalChange," Econometrica, ctober,1957. I am indebtedto A. C. Harberger,MartinJ. Bailey, Lester G. Telser, and T. W. Schultzforvaluable comments nd to theNational ScienceFoundation nd the Social ScienceResearchCouncilforfinancialupport.

This estimatewitl not tell us theglobalrate ofreturnon researchexpenditures,but even a modeststep in thatdirectionmay be ofsomeuse.Tihe followingprocedure is used toarrive t theestimate:First,privateandpublic researchexpenditureson hybridcorn,1910-55,are estimatedon thebasisof a mail surveyand otherdata. Thenthe annual grosssocial returns re esti-mated on the assumptionthat theyareapproximately qual to the value of theresultingncrease ncornproduction lusa price-changeadjustment. The addi-tional cost of producinghybridseed issubtractedfromthese gross returnstoarrive at an annual flowof net socialreturns. Using first a 5 and then a10 per cent rate of interest, bringall costs and returnsforwardto 1955,whenthe books are closed on thisdevel-opmentand a rate ofreturns computed.Research costsare expressed s a capitalsum, and returns are converted nto aperpetualflow.The estimatedperpetualflow ofreturns s divided by the cumu-lated researchexpenditures o arriveata rate of returnthat will equalize thepresentvalue oftheflowofreturnswiththecumulatedvalue ofresearch xpendi-tures.This procedure eads to the esti-mate that at least 700 per centper yearwas being earned, as of 1955, on theaverage dollar invested in hybrid-cornresearch.Sincethis s not theonlyway inwhicha rate ofreturn ouldbe computedfromthese data, sonie alternative ways of

419


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420 ZVI GRILICHESdefining nd estimatingthe social rateof return re exploredbriefly. ompari-sons are also made with estimates ofreturnsn some other reas oftechnologi-cal change.Finally, discuss the limita-tionsof theprocedureused and the im-plications of the results. In particular,I shall emphasizethatalmostno norma-tiveconclusions an be drawnfrom hesefewestimates.

RESEARCH EXPENDITURESInbred lines and hybridshave been

developed by state agriculturalxperi-ment tations, heUnitedStatesDepart-ment of Agriculture USDA), and pri-vate seed companies.The distinction e-tweenthe first wo developing agenciesis mainly n the sourceoffunds.Exceptfor funds spent on research and co-ordinating ctivities t Beltsville,Mary-land, most of the USDA funds werespent on co-operative orn-breeding e-searchat variousexperiment tations.A mail inquiryto ascertain expendi-tures on hybrid-corn esearch was sentto all the agriculturalexperiment ta-tions, and usable data were obtainedfrom wenty f them. The twenty tatesrepresented y thesereplies ncludemostofthe mportant orn tates in thecoun-try.Expenditures fnon-respondingta-tions were estimatedby settingthe ex-penditures f each of then equal to theexpenditures fa "similar" station.2Data on USDA expenditures n "corn-production esearch:agronomicphases"beginningwith1931wereobtained fromthe AgriculturalResearch Service andextrapolatedback to 1910. They over-

2 Thepairing wasmadeonthebasis ofgeographicproximity nd general informationbout the in-dustry. or example,ndiana expenditureswere s-sumedto equal the reported llinois expenditures;Oklahoma's oequal Kentucky's,ndsoforth. hesepairings probably overestimate he total expendi-tures n hybrid-cornesearch.

estimate the USDA contribution ubstantially,because they include variousother aspects of corn research besideshybrid corn. Moreover, some of theUSDA fundshave alreadybeen countedin the expendituresof agriculturalex-periment tations.The researchexpendituresof one ofthe major private seed companies forthe years 0925-55 were extrapolatedback to 1911 and dividedbythat firm'sestimatedshare of the total marketforhybrid eed corn to arrive t an estimateof theresearch xpenditures f the "pri-vate" segment ftheindustry.'The figures or1955may be used as anexampleof thenumbers nvolved. esti-mate that n1955the USDA spentabout$300,000 on hybrid-corn esearch, theexperiment tationsabout $650,000,andtheprivatecompanies bout $1,900,000.4The historical research expendituredata, deflated by the ConsumersPriceIndex (1955 = 100), are reproduced ncolumn1 ofTable 1. In view of all theassumptionsmade, these figures houldbe taken with severalgrains ofsalt,thedosage increasing s one goes back intothe past. In particular, for the years1910-25, thefigures re littlemore thanguesses.For thepurposeofestimating he rate

3This will again overestimate xpenditures, e-cause "public" hybridsmake up 25-30 per centof the total market, nd researchexpenditures nthese have alreadybeencountedonce.4In 1951 M.T. Jenkins, f theUSDA, estimatedthe total annual expenditures n hybrid-corn.e-search s follows:USDA, $220,000; tates, 600,000;and private industry,$1,100,000. M\,y wn in-dependentestimate for 1951 is: USDA, $190,000;states,$550,000; private ndustry, 1,300,000.Thetwototals are$1,920,000 nd$2,040,000, espective-ly. The agreement s very close, consideringhoewarbitrarysome of my assumptionsare (see M.T. Jenkins,"Corn Breeding Research-WhitherBound," Proceedings f theSixth Annual HybridCorn ndustry-ResearchonferenceChicago:Amer-ican Seed Trade Association,November,1951],Pp.42-45).


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RESEARCH COSTS AND SOCIAL RETURNS 421ofreturn ntheseexpenditures, assumethat the public sector will continue toinvest in hybrid-cornresearch at anannual rate of$1 million, nd theprivatesector at an annual rate of $2 million.No incrementalreturns,however,willbe ascribedto these expenditures. as-sume them to be "maintenance" ex-pendituresnface of malevolentnature.

COST OF ADDITIONAL RESOURCES DEVOTEDTO PRODUCTION OF HYBRID SEED

I assume that the price of hybridseed, approximately$11 per bushel in1955, measures adequately the valueof resourcesdevoted to its production.If there were no hybrid corn, farmerswould use mainlyhome-produced pen-pollinatedseed, which I value at $1.50per bushel.5 he quantityofhybrid eedused annually was estimatedby multi-plying hereported ornacreageplantedwithhybrid eed by the average seedingrate of corn.Multiplyingthe resultby$9.50, the difference etween the priceofhybrid nd non-hybrideed, and sub-tracting 2million esearch xpenditures,I get $90 million as my estimate of theadditional resources currentlydevotedeach year to hybrid-seedproduction.6Using the average 1939-48 cornacreage(90 million), the 1951 seeding rate (7.5pounds per acre), and the percentageplanted with hybrid seed, I computedthe additional cost of hybrid seed forthe years 1933-55 and subtracted this

5This is somewhathigher han themarketpriceof cornbecause of the betterquality of seed cornand the labor that would go into its selection.Since open-pollinatedeed is now quoted at about$3.00 to $4.00 a bushel,thisassumption lso con-tributes o an over-all verestimatefcost.6This resultis reached as follows:80 million

acresX 90 per cent in hybridsX (8.6/64) averageseedingrateX $9.50 = $92 million. ubtracting 2millionresearch xpenditures,we get $90 million(source:Agriculturaltatistics, 955).

fromthe subsequent estimate of grossreturns o arriveat a net return igure.7THE VALUE OF HYBRID CORN TO SOCIETYAs everyoneknows, hybrid corn in-creasedcornyields.The figuremostoftenquoted for this increase is 20 per cent.For my purpose, assume that the su-periority fhybridover open-pollinatedvarieties s 15 per cent,the lowerfigurein most estimated ranges.8The valueof this ncrease o "society"willbe meas-uredby theloss in total cornproductionthat would have resulted if therewereno hybridcorn. This hypothetical osswill be valued at the estimatedequilib-riumprice of corn plus a price-changeadjustment, a procedureequivalent tocomputing the loss in "consumer sur-plus" that would occur if hybrid cornwere to "disappear."The amount of this loss will dependon our assumptionsabout the relevant

demand-and-supply lasticities.As willbe seen from heformulas resentedbe-low,theseelasticitieshave only a second-ordereffect,nd hence differenteason-able assumptions bout themwill affectthe results very little. I assumed thatthe price elasticity of the demandforcorn is approximately-0.5.9 Since we7Throughout heperiodthesecomputations sethe average cornacreage planted in 1939-48; they

disregard nnual fluctuationsn total cornacreageand seedingrates. For any year before1956, theextra cost of seed equals the percentageplantedwithhybrid eed times$98 million 90 millionX[7.5/64]X $9.50 - $2 million [research expendi-tures]= $98 million).8 For example: "Plant breedersconservativelyestimate increase in yields of 15 to 20 per centfrom singhybrid eed underfield onditions. heyexpect about the same relativeincreases in bothlow-and high-yieldingareas" (USDA, Technologyon theFarm [Washington, 940],p. 7).9This figures based on a USDA demandanal-ysis (see R. J. Foote, J. W. Klein, and M. Clough,TheDemandand PriceStructureorCornand TotalFeed ConcentratesTechnicalBull. 1061 (Washing-ton: USDA, October,1952)]).


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422 ZVI GRILICHESknowmuch less about the supply elas-ticityof corn, I shall firstexplore theconsequences of two differentxtremeassumptions bout it.Let us assume,first, hat in the longrunthesupplyofcorn s infinitelylastic;that is,we face long-run onstantcosts.The "disappearance" of hybrid cornwould shift the supply curve upwardby thepercentagereduction n the yieldU

m1


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RESEARCH COSTS AND SOCIAL RETURNS 423the first assumption-that of an in-finitely lastic long-run upply of corn.To calculatetheloss,we mustassumean equilibriumprice ofcorn. shall use$1.00 per bushel in 1955 dollars as aminimal estimate of the value of cornto society. The currentprice of cornabout $1.25, is affected y the esixtenceofprice-support rograms nd probablyoverestimates he social value of corn."Because not all corn acreage was oris planted withhybrids, multiplythepercentage hiftk by It,the percentageof all corn acres planted with hybrids(loss = hkPQ[1 ->-hkn]). This proce-dure disregards he fact that the acresfirst planted to hybrids were higher-yielding cres than those planted later,and hencetheprocedureunderestimatestotal returns.In estimating ast returns rom ybridcorn, I ignore annual fluctuations nprices and production,basing my com-putationson the average 1937-48 levelof productionof 2,900 millionbushels'2and a real price of corn of 4t.00 perbushel in 1955 dollars. On the returnsside, only the percentageplanted withhybridseed varies over tine. To cal-culate the annual flowof future eturns,

11An approximate ormulafordeterminingheprice of corn in the absence of price supports sgivenbyMarcNerlove n"Estimatesof theElastic-itiesof Supplyof SelectedAgricultural ommodi-ties,"Journal fFarmEconomics, XXVIII (May,1956), 497: dp/po= (dq/q)/(n+ e), where po isthe equilibrium rice,n and e are the demand-and-supply elasticities, nd dq is the quantityplacedunder loan. In recentyears about 7 per cent ofthe annual corn crop, on the average, has beenplacedunder oanwiththeCommodity reditCor-poration.The assumptions = 0.5, e = 0.2, implythat the current rice is about 10 per cent abovethe equilibriumprice. The currentprice is about$1.25 per bushel,which impliesan "equilibrium"price of corn of about $1.t13.But this estimatedoes not take into account the impact on cornpricesof the elimination f price supportson allother agricultural ommodities.Taking this intoaccount,the equilibriumpricewouldbe closer to$1.00 per bushel. In any case, it is unlikelytobe lower han$1.00.

I assume that the average 1943-52 levelofproduction-approximately ,000mil-lionbushelsannually-will continue ndthat thepercentageplantedwithhybridseed will stabilize at 90. Both these as-sumptionsare conservative nd will re-sult in an underestimate freturns.Assuming that k, the relative shiftin the supply curve, is 0.13 (15/ 15);that PQ is $3,000 million; that n, thedemandelasticity,s 0.5; and thath,thecurrentand futurefractionof all cornacresplantedwithhybrid eed, s 0.9,wecan calculate the current nd expectedannual flow of gross social returnsfrom hybrid corn as follows: 0.9 X0.13 X $3,000 million (1 - - X 0.9 X0.13 X 0.5) = 0.117 X $3,000 million(1 - 0.029) = 0.117 X 0.971 X $3,000million= $341 million.Subtractingtheprojected annual cost of hybrid-seedproduction nd research $93 million-we get $248 millionas the current ndexpected annual flow of net social re-turns.Similarly,returnsforthe past years,beginningwith 1933, are calculated bymultiplying ,900 million 1955 dollars,the average total value of cornproduc-tion, by the percentage of total cornacreageplantedwithhybrid eed ineachyear. Subtracting the estimated pastcosts ofhybrid-seed roduction,we getthenet social returns or heyears 1933-55 shown n column 2 of Table t.13

12 This assumptionwas made to simplify hecalculations. n the first artoftheperiod,produc-tion wasbelowthisfigure,nd,since use a relative-ly highrate of interest, hiswill result n an over-estimate freturns. ut thepercentage lantedwithhybridswas also low then,while t was muchhigherduringthe period when productionexceeded itsaverage,and this will result in an underestimateof returns.On balance, the second effect houldoutweigh hefirst y a fairmargin.1' These are calculated from the following or-mula: h X [0.13X $2,900 million (1 - 1/2X 0.9X 0.13 X 0.5) - 90 millionX (7.5/64) X $9.50 -$2 million] h X $268 million.This procedure san approximation,inceh shouldalso have entered


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424 ZVI GRILICHESTABLE 1

HYBRID CORN: ESTIMATED RESEARCH EX-PENDITURES AND NET SOCIAL RETURNS,1910-55(Millions of1955Dollars)Total ResearchExpenditures(Private and Net SocialYear Public) Returns*1910....... 0.0081911 0.0111912 0.0101913 . 0.0161914 0.0221915 . 0.0321916 0.0391917 0.0391918 0.0391919 0.0441920 0.0521921 0.0681922 0.0921923 0.1051924 0.1241925 0.1391926 0.1491927.. 0.1851928 0.2101929 0.2851930 0.3251931 0.3951932. 0.495

19330.584 0.31934 0.564 1.119350.593 2.91936. 0.661 8.3193 7 0.664 21.21938 0.721 39.91939 0.846 60.31940 1.090 81.71941 1.100 105.31942 1.070 124.31943 1.390 140.41944 1.590 158.71945. 1.600 172.61946. 1.820 184.719471.660 194.319481.660 203.719491.840 209.81950 2.060 209.019512.110 218.71952. 2.180 226.71953 2.030 232.11954. 2.270 234.21955. 2.790 239.1Annually fter1955 3.000 248.0

* Net of seed productionost but not net ofresearch xpenditures. et social returns re zerobefore 933.into thesecondpartofthe first erm f theformula,the "triangle." I neglect this. Because It is lessthan 1 and because thatpart is always subtracted,this procedure gain underestimatesotal returns.

CALCULATION OF A RATE OF RETURNTable 1 presents estimates of costsand returns.There are several ways in

which these figures ouldbe summarizedand a rate of return alculated.My pro-cedure s as follows:Considerthe devel-opment closed as of 1955. Future ex-penditureswill not increasereturns,norwill there be an expansion ofhybrid-cornacreage. Standing n 1955, cumu-late and bringforward o 1955 all pastcostsand returns t a reasonableexternalrate of interest.To explore the impactof two quite different ates of interest,I perform he calculations twice, usingfirsta 5 per cent and then a 10 percent rate of interest. ast research ostsare cumulatedand expressed s a capitalsum.Past returns re cumulatedto 1955,and a 5 or 10 per cent rate of returnon these cumulated returns s projectedinto the future.The estimatedflow offuturenet returns s added to the flowfrom ast returns oarrive t a perpetualflowof net social returnsfromhybridcorn.Thisflow, ividedbythecumulatedresearchexpenditures, ives us our esti-mate of the realized perpetual rate ofreturn.Table 2 presents he calculationsthatlead to my estimate of approximately$7.00 as theannual return nperpetuity,as of 1955, for every dollar that hasbeen invested in hybrid-corn esearch.Actually,even ifwe ignoreall past re-turnscompletely, he figure s stillveryhigh-approximately$4.00 annually us-ing the 5 per cent interestrate) foreveryresearchdollar.This way of calculating a "rate ofreturn" is not really different rom abenefit-costatio calculation. t may beuseful to bringout explicitlythe rela-tionship etween hesetwoconcepts.Theprecedingrate of return is definedas


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RESEARCH COSTS AND SOCIAL RETURNS 425follows:r 100 PR X k + AFR)/RC,wherePR= cumulatedpast returns,k= the externalrate of interestused tocumulate or discount returns,AFR =annual future eturns, nd RC = cumu-lated research osts.A benefit-cost atio fromthese samedata would be BIC = (PR +AFR k)/RC. Hence r= 100k (BIC), and we cantranslateour calculation nto a benefit-cost ratio, and vice versa. Using 5 and10 per cent as the externalrates of in-terest, hebenefit-cost atios forhybrid-cornresearchexpenditures re 150 and70, respectively.14When we recall thatmostBureau ofReclamationwatershedprojectshave ex post benefit-cost atiosof 1 or less, this does imply a certainmisallocation fpublicresources.15These calculationsuse an external ateof interest to bring all sumns orwardto 1955. It is reasonable to assume thatthe marginalproductivity f capital inalternative nvestmentss between5 and10 per cent and to use these rates asconversionfactorsfor funds expendedorearned at differentates. Alternative-ly, however,one could calculate an in-ternal ateofreturn-thatrateof nterestwhichwill equate the flowof costs andthe flow of returnsover time.'6 Sucha rate has to be calculated using aniterative procedure,changing the rateused untilthecumulatedcosts are equal

14 f before umulatingwe wereto subtracttheresearchcostsfromnet returns nnually (that is,have in ourdenominatornlyresearch xpendituresbefore1934, the year whennet returnsbegan toexceedresearch osts),thebenefit-costatioswouldbe substantiallyhigher (about 700 and 200, re-spectively), nd so would also the rate of returnas defined n thetext.15 For an evaluation of public investments nlwatershedprojectssee E. F. Renshaw,TowurdRe-

sponsibleGovernmentChicago: Idyia Press, 1957).16 am indebted oMartinJ.Baileyfor uggest-ing this alternativeway of calculatingthe rateofreturn.

to the discountedreturns.The twopro-cedureswillgive differentnswerswhenthe timeshape ofcosts differsmarkedlyfromthe time shape of returns,as inour case. The internal rate of returnon hybrid-cornesearchexpenditures sbetween 35 and 40 per cent."7My ob-jection to this particular procedure isthat it values a dollar spent in 1910at $2,300 in 1933. This does not seemvery sensible to me. I preferto valuethe 1910 dollar at a reasonable rate ofreturn n somealternative ocial invest-TABLE 2

RATE OF RETURN ON HYBRID-CORNRESEARCH EXPENDITURESAS OF 1955(Millions ofDollars)r=0.05 r=0.10(1) Net cumulated past re-turns................. 4,405 6,542(2) Past returns xpressed san annualflow......... 220 654(3) Annual future gross re-turns................. 341 341

(4) Annual additionalcost ofproductionnd research.. 93 93(5) Total net annual returns,(2)+(3)-(4) ............ 468 902(6) Cumulated past researchexpenditures........... 63 131(7) Rate of return 100 X(5)/(6) ................. 3 689ment. Also, this procedure gives tre-mendous weight to the early expendi-tures,which are subject to the largesterror of measurement.Actually, how-ever, the two estimates are not veryfarapart. The estimateusingan externalrate of nterest aysthata dollar nvestedin hybrid-corn esearchearned 10 centsannuallyuntil 1955 and $7.00 annuallythereafter.The internalrate estimatesays that the dollar earned 40 centsannually throughout he whole period.If theaveragedelay between nvestmentand fruition s about ten years, then17 That is, 40 per cent is too high and 35 istoo low. The iterativeprocedurewas not carriedfurther.


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426 ZVI GRILICHESthe two figures epresentdifferentaysof sayingthe same thing.'8

LIMITATIONSThe estimateof 700 per cent is prob-ably too low. At almost every pointat whichthere was a choice of assump-tions to be made, I have purposelycho-sen those that would result in a lowerestimate. This is an attempt o arriveat an estimated ower imit of the socialrate ofreturn romhybrid orn.Both the public and the private re-

search expenditures re probably over-statedsubstantially.n fact, heexpendi-ture estimates suppliedby some experi-ment stations are obviously too high.OftheUSDA expenditures, erhapslessthan half were devoted to hybrids. Ididleave outall expenses ncurred efore1910, but these in total could not havebeen more than a few thousand dollars.This should remind us, however, thatthe estimatedrate of return s mainlya rate of returnon applied ratherthanbasic research.The basic idea ofhybridcorn was developed between 1905 and1920,withthehelp ofvery ittlemoney.The rateof return n this basic research,if t couldbe calculated,would be muchhigher.However, the idea had to betranslated to commercial reality, andseparate adaptable hybridshad to bedevelopedfordifferentreas. These arethe activities reflected n my estimateof research ost.The returns, n the otherhand, areunderstated.The assumed price of cornof $1.00 per bushel in 1955 dollars andthe assumption of a 15 per cent su-

18 An annual flowof 40 cents discounted t 40per cent has a presentvalue of $1.00. An annualflowof $7.00, discounted t 40 per cent,will alsohave a presentvalue of $1.00 if there s a lag ofapproximatelyenyearsbetween hedate of nvest-mentand the date at whichthe perpetualflowofreturns e-ins.

periority f hybridsare both conserva-tive and probably result in an under-estimate of the real returnsto society.I have also assumedthatall pastresearchhas already borne all its fruit nd thatall future esearchon hybridswillresultin no benefitwhatsoever.Nor has creditbeen given for the impact of hybridcorn on otherfields:the researchon hy-bridpoultry nd hybrid orghumwhichit stimulatedor the reductionoffarmerresistance o newtechnology s a resultofthespectacular uccess ofhybrid orn.tHence,s far s costsand returns romhybridcorn per se are concerned, theestimate is too low. One troublesomeproblem,however,remainsto haunt us.Does it really make sense to calculatethe rate of returnon a successful"oilwell"? What is the pointofcalculatingthe rateofreturn none oftheoutstand-ing technological successes of the cen-tury?Obviously, t will be high. What

we would like to have is an estimatethat would also include the cost of allthe "dryholes" thatwere drilledbeforehybrid orn was struck.The estimate does include the costof all the "dry holes" in hybrid-cornresearch itself.Hybrid corn was not aunique invention--itwias an inventionofa methodof nventing.Many differentcombinationsweretriedbefore herightones were found.One major seed com-pany annually tests approximatelyfif-teen hundred differentombinationsofinbred lines. Of these, at most threeor fourprove to be successful.The costof the unsuccessfulexperiments s in-cluded nmyestimate.What is excludedis investment n various other areas ofagricultural esearchwhichhas notbornefruit.The problemof dry holes, however,can be reduced ad abszrdmr. What isthe relevant egment orwhich n aggre-


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RESEARCH COSTS AND SOCIAL RETURNS 427gate rate of return s to be computed?Is it really reasonable to ascribe thecost of unsuccessful old explorationtothe oil industry?f one takes this kindofreasoningtoo seriously, here s onlyonerate that has any meaning-the rateof return on research for the economyas a whole.Nevertheless,the rate of return ona successful nnovationmay be of someinterest. n particular,t may be useful,ex ante, to break down the probablerate ofreturn nto two components: herate of return f the developmentturnsout to be a success and the probabilitythat it will be a success. The approachoutlined here is a way of estimatingthefirst omponent.An estimateof theprobabilityof success, however. mustbe made on the basis ofdata otherthanthosepresented n this article.

RETURNS IN SOME OTHER AREAS

T. WV. chultz has provided us withestimates f costsand returns fresearchforUnitedStatesagricultures a whole.19His data can be used to estimate therate of returnon agriculturalresearchas a whole. Schultzgives an upper- anda lower-limitstimateofhowmuchmoreinput it would have taken to producethe 1950 output with 1940 techniquesand inputs.His upper estimate is thatit would have taken 18.5 per cent moreinput; his lower estimate s 3.7 per cent.Let us use Schultz's figures o estimatethe perpetualgrossannual returns,be-ginningwith1951,from heagriculturalresearchthat bore fruitbetween 1940and 1950.Usingthe ower stimate, herewouldbe a loss of3.7 per cent n outputifthe newtechnologywere to disappear.Taking the total annual value of farmoutput as $30 billion ($32 billion cash

19The EconomicOrganization fAgricullureNewYork: McGraw-HillBook Co., 1953), pp. 114-22.

receipts fromfarmmarketingsn 1951,minus pproximately 0 per cent to allowforthe mpact ofthe supportprograms),and assuming a price elasticityof de-mand foragriculturalproducts of -.25and an infiniteupplyelasticity,we getk 1-Akn) X$30 billion= 0.037

X (1 - 0.5 XO.037 XO.25)X$30 billion= 0.037 X0.995

X$30 billion= $1,110 million.Using the upper limit estimate of 18.5per centsavingin inputs,we get0.185 (1- 0.5 X0.185 X0.25)

X $3 0 billion $5,43 0 millionas an upper-limit stimate of the grossannual social returnfrom the technicalchange that occurredbetween1940 and1950.Schultz also provides an estimate oftotal public expenditures on agricul-tural research for the years 1937-51.I assumethatall theseexpenditureswereused to producethe increase in outputin 1951.This leaves out thecontributionsdevelopedfrom unds pent before1937,but, on the other hand, it disregardsthe possible returns after 1951 fromthe 1937-51 expenditures. On balance,we willprobably overestimate he fundsspent on the 1940-50 improvement ntechnology.I will assume that total private agri-cultural research expenditures were ofabout the same magnitude s the publicexpenditures.This is approximately alfthe corresponding atio forhybridcornbut is probablyan overestimate or gri-culture s a whole.20

20 Mighellhas estimatedthat recent nnual ex-penditures y industry orresearch n agriculturalproductsand on machinery nd materialsused inagriculturewere in excess of $140 million.At thesame time theUSDA and state agriculturalxperi-


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428 ZVI GRILICHESMultiplying the 1937-51 public ex-pendituresby 2, deflating hem by theConsumersPrice Index, and cumulatingthem at the rate of 5 per cent, get thefigureof 3,180 million 1951 dollars asmy estimateof total cumulated researchexpenditures n agriculture.Comparingthis with the two estimated limits ofthe annual social.returnsof $1,110 and$5,430 million, get a lower limit of35 and an upper limit of 171 per centas estimatesof theannual rate ofreturnperdollarspenton agricultural esearch.

These are substantially ower than theestimatedreturns romhybridcornbutare comparable to estimates made byEwell forthe economy s a whole (100-200 per cent per year per dollar spenton "research nd development") and tofigures uoted by major industrial om-panies on theirreturns n research.21Of course, these estimates are quiteconsistent with the estimated returnson hybrid corn, if the probability ofsuccess in researchon innovations ikehybrid orn s on the order ofone-tenthor one-twentieth. evertheless, ll thesefiguresndicate that, n spite of the argegrowth n research expendituresduringthis century, he social returns to thisactivity re stillveryhigh.

HYBRID SORGHUMThe approach previously utlined canbe used to estimate the probable rateof return on a new development: for

meantstations spent ai)ut $118 million annuallyon research.However, n.iv ne-third f the ndustryresearch was in aid of farm production,mainlyin machinery nd cheminicals:he rest was usedin product rc:^earch, hilefPur-fifthsf public ex-penditureswereforresearch n aid offiarrnroduc-tion (see R. Mlighell, A mcwrioan A oricul-bure [NewYork: JohnWiley & SoTIs, 955J, . 130).21 R. H. Ewell, 'Role of Research in EconomicGrowth," hlemical and ngineering ews,XXXIII(1955), 298-304.

example,hybrid orghum.The develop-ment ofhybrid orghumbegan seriouslyonly afterWorldWar II but has gainedmomentumrapidly since. Hybrid sor-ghumis now being introduced ommer-cially. Very littlewas planted in 1956,but substantial amounts were plantedin 1957. The experimentaldata to datesuggest that the superiority f hybridsorghum ver previous eedmay be evengreater han that of hybrid orn.22The 1956 value of the grainsorghumcrop was approximately$232 million.Assuminga 15 per cent superiority fhybrids,a demand elasticity of -1.0,and an infinitely lastic supply curve,the estimated gross social returnsfromsorghumhybridswould be about $37million annually.23Assuming that theextra cost of hybridseed will be about$7 millionannually, the net annual re-turnswould be about $30 million24 Inave noofficial ata onresearch xpendi-tures on hybridsorghum.The head ofone of the major seed companies hasestimated hat to date all publicand pri-vate expenditureson hybrid sorghumtotal approximately 1 millionand thatcurrentexpendituresare at an annualrate of $300,000. Doubling his estimateofpast expenditures nd projecting ntothe future n annual researchexpendi-turerate of $500,000, I get $10 or $13million, epending n therateof nterest

22 SorghuZtmybrids USDA, ARS, Special Report22-26 [Washington,May, 1956]).23 This figure s derived as follows: 0.15 (1 +

2 X 0.15 X 1.0) X $232 million = 0.16 X $232 =$37 million.The figurewould have been approxi-matelytwice as large if I had used the value ofthe 1957 crop-$493 million-as mybase.2 The additionalcost ofhybrid eed, seven mil-liolndollars, s estimatedfromthe following ata:10 million cres sown to sorghum; en dollars dif-ference between the average prices per hundred-weight fhybrid nd open-pollinated rain orghumseed (Agricultural rices,April, 1958, p. 42); andan average seedingrate ofsevenpoundsper acre.


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RESEARCH COSTS AND SOCIAL RETURNS 429used, as my "estimate" of cumulatedhybrid-sorghumesearch xpenditures n1967. I choose 1967 as the reckoningdate on the assumptionthat itwill taketenyearsforhybrid orghum o capturemost ofthesorghum eed market.Whilethe projected rate of development isfaster than that of hybrid corn in theUnitedStates as a whole, t is equivalentto therate ofacceptance ofhybridcornin Iowa. It is reasonable to assume thathybrid orghumwill spreadmuchfasterthanhybridcorndid. Sorghumproduc-tionis more ocalized than cornproduc-tion, almost all sorghumis grown forcommercialpurposes, and hybrid sor-ghumwillprobablyencountermuch essresistance hanhybrid ornencountered.I also assume that the use of hybridsorghumn theUnited States willfollowthe same timepath that the use of hy-brid corn followed n Iowa.25 This as-sumption llows me toestimate hesocialreturnsduring the "transitionperiod,"1957-67.Table 3 outlines the calculation ofthe estimated ate of returnon researchexpenditures n hybrid orghum,whichis approximately 00percentperannum.While this is somewhatlower than theestimatedrate of return n expenditureson hybrid-corn esearch, t is still veryhigh ndeed.

SOME IMPLICATIONSOne mighthave expected,on a priorigrounds,that the rate of returnon ex-penditureson hybrid-sorghumesearchwould be higher han the returnon hy-brid-cornresearch. The cost of hybridsorghum has been and will be lowerthan thecostofhybrid ornbothbecauseof the cumulatedexperience n hybrid-25 The percentage fall cornplantedwithhybridseed in Iowa followedthe following imepath byyears: 0.02, 0.06, 0.14, 0.31, 0.52, 0.73, 0.90, 0.99,and 1.00.

corn breeding and because sorghum-growing is much more localized thancorn-growing. herefore, daptable hy-brids will have to be developed for amuch smaller portion of the UnitedStates. Nevertheless, the estimated re-turns from hybrid sorghum are lowerthan those fromhybrid corn. Why? Tosome extent this lower rate may be aresult of overestimating esearch costsfor hybrid sorghum, but the principalexplanation is that the total value ofthe sorghum rop s substantially mallerthan thatofcorn;sorghums a relativelyTABLE 3

ESTIMATED COSTS AND RETURNS OFHYBRID-SORGiHUM RESEARCHAS OF 1967(Millions fDollars)r=O0.05 r=O.10Cumulatedocialnetreturns,1957-66................ 155 171Value n 1967 ofreturns-yond1967.............. 590 295Total value ofnetreturnsn1967................... 745 466Cumulatedesearchx-:endi-tures................... 9.4 13Benefit-costatio.......... 79 36"Rate of return" n per centper nnum....... 395 360

unimportant rop. It has recentlybeensuggested that we should redirect ourresearch efforts way fromthe majorcommodities hat are in "surplus" andaway fromcommoditieswith low elas-ticities of demand,where technical im-provementsresult in reduced total re-turnsto farmersn the long run. I-ow-ever, if we assume, in the absence ofanyothernformation,hattechnologicalchange operates somewhat like a per-centage increase in yield, and that thecost of achieving a given percentageboost in yield is the same for differentcrops or at least independentof theirprice elasticities and relative "impor-tance," then the highestsocial returns


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430 ZVI GRILICHESper researchdollar are to be found inthe important, ow-elasticity ommodi-ties. For it can be easily shown thatthe absolute social gain from a givenpercentage increase in yield will varyproportionatelywith the total value ofthecrop and thatthe mpact ofdifferentdemand-and-supply lasticities is of asecond order of magnitude.The latteraffect nly the "triangle,"or themagni-tude of the price-changeadjustment.Amongall thedifferentactors, he totalvalue of the crop is by far the mostimportantdeterminant f the absolutesocial gain from given percentage n-crease n yield.No matter how we calculate them,there is little doubt that the over-allsocialreturns npublicly upported ech-nologicalresearchhave been veryhigh.It is not clear,however,whether r notthisfacthas anynormativemplications.I am afraid thas veryfew.Moreknowl-edge than is now at hand is requiredforpresciption.It is clear thatwe have not succeededin equalizing the returnson differentkindsofpublic nvestments. he returnsfromtechnologicalresearchhave beenmuchhigher han the returns rom ec-lamation and watershedprojects. Butshouldwe have had more technologicalresearch?Surely, we have yet to reachthe optimal level of expenditures n re-search, but this can only be a hunch.Should the public support agriculturalresearch? My analysis illustrates andquantifiesone of the major argumentsforpublic nvestmentsn this area-thedivergencebetween the social and pri-vate ratesof return.Almost none ofthecalculated social returns from hybridcornwere appropriatedby the hybrid-seedindustry rbycornproducers.Theywere passed on to consumers in the

formof lower prices and higheroutput.Entry ntothehybrid-seedndustrywaseasy,and in the longrun no "abnormal"profitsweremade there.By valuing theextra cost of seed production t themar-ketprice, have counted as a costwhat-ever profit was made in this area byprivateproducers, nd theresulting sti-mate ofreturns onsistsalmost entirelyof social rather than private returns.These social returnswere diffused idelyamong consumers fcorn and cornprod-ucts. Given the difficulty f patentingmost of the valuable ideas in this area,the short ifeof a patent,and thegeneralprecariousnessof a monopoly positionin the long run, the incentive orprivateinvestmentwas very muchsmaller thanthat impliedby thesocial rateofreturn.Whilea divergence etween ocial andprivate rates of return is a necessaryreason forpublic intervention,t is not,by itself, sufficienteason. We mustask not only whether ocial returns rehigher than private-this is also trueof many private investments-but alsowhether the private rate of return istoo low,relative o returns nalternativeprivate investments, o induce the rightamountof investment t the right ime.The social returns romnylonwere prob-ably many times higher than DuPontprofits, ut the latter werehighenoughto induce thedevelopment fnylonwith-out a public subsidy, lthough,perhaps,not soon enough. To establish a casefor public investmentone must showthat, n an area wheresocial returns rehigh,privatereturns, ecause of thena-ture of the inventionor of the relevantinstitutions,re nothigh enoughrelativeto otherprivate alternatives. This wasundoubtedlytrue of hybrid corn, andit is probablytrueof many other areas


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Griliches JPE 1958

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