The Macro Impact of Short‐Termism

R&D investment reduces current profits, so short‐term pressure to hit profit targets may distort R&D. In the data, firms just meeting Wall Street forecasts have lower R&D growth and subsequent innovation, while managers just missing receive lower pay. But short‐termist distortions might...

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Bibliographic Details
Published in:Econometrica 2023-09, Vol.91 (5), p.1881-1912
Main Author: Terry, Stephen J.
Format: Article
Language:English
Subjects:
Endogenous
Innovations
Profits
R&D
Research & development
Social welfare
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Summary:R&D investment reduces current profits, so short‐term pressure to hit profit targets may distort R&D. In the data, firms just meeting Wall Street forecasts have lower R&D growth and subsequent innovation, while managers just missing receive lower pay. But short‐termist distortions might not quantitatively matter if aggregation or equilibrium dampen their impact. So I build and estimate a quantitative endogenous growth model in which short‐termism arises naturally as discipline on conflicted managers and boosts firm value by about 1%. But short‐termism reduces R&D, and the social return to R&D is higher than the private return due to standard channels including knowledge spillovers and imperfect competition. So at the macro level, short‐termist distortions slow growth by 5 basis points yearly and lower social welfare by about 1%.
ISSN:0012-9682
1468-0262
DOI:10.3982/ECTA15420