R&D Reallocation to 'High Step Size' Firms Could Accelerate Growth, NBER Study Finds

Cambridge, MA – New research from the National Bureau of Economic Research (NBER) suggests that governments could significantly accelerate economic growth by strategically reallocating research and development (R&D) investments. A working paper titled "Good Rents versus Bad Rents: R&D Misallocation and Growth," authored by Philippe Aghion, Antonin Bergeaud, Timo Boppart, Peter Klenow, and Huiyu Li, argues for directing R&D towards innovative firms that generate substantial knowledge spillovers.

The study identifies a critical distinction in how firms achieve profitability and contribute to the broader economy. Some companies generate "good rents" through "bigger step sizes" from quality innovations that confer significant knowledge externalities onto other firms. Conversely, others achieve high markups, or "bad rents," primarily due to superior process efficiency or other factors that offer no obvious knowledge externality to the market.

The researchers propose that a "social planner" would ideally reallocate research efforts away from firms with high markups based solely on process efficiency and towards those driving quality innovations with broad societal benefits. This strategic shift aims to correct a misallocation of R&D resources often observed in a "laissez-faire equilibrium," which may not optimize overall economic expansion.

To support their theoretical framework, the authors developed an endogenous growth model and applied it to extensive price and productivity data from French manufacturing firms. This empirical analysis allowed them to infer firm-specific "step sizes" and process efficiency levels, providing concrete evidence for the proposed R&D misallocation.

The paper concludes that faster economic growth is achievable through such targeted R&D reallocation. Furthermore, the study suggests that growth could be even more robust if innovative "high step size" firms were able to freely license their breakthroughs to "high process efficiency" firms, thereby combining the strengths of both types of companies.

The NBER highlighted the paper's findings, stating on social media, > "The economy could grow faster if government policy could reallocate R&D towards innovative firms (with big spillovers) and away from with high markups due to high process efficiency," referencing the work by Aghion, Bergeaud, Boppart, Klenow, and Li. The working paper, NBER No. w34190, was published in August 2025.