A NEW PERSPECTIVE ON UNDERINVESTMENT IN AGRICULTURAL R&D

consumers and producers may have different incentives to lobby for public agricultural R&D. They
show that, depending on the allocation mechanism, differences in the incidence of R&D costs and
benefits between consumers and producers will result in different levels of public R&D investment,
some of which are considerably below the social optimum.

Each of the possible explanations for underinvestment in agricultural R&D listed above only
explains a (small) part of the observed gap (Roseboom forthcoming 2002). Jointly, however, they may
come a long way in explaining the gap. Moreover, the investment gap is so much larger for
developing than for developed countries because of: (a) less precise information; (b) higher
uncertainty; (c) more budget rigidity; (d) (probably) higher tax burden rates; (e) less perfect selection
procedures; and (f) lack of political will and organizational capacity in society.

7. Conclusions

The model presented in this paper helps a great deal in structuring the underinvestment hypothesis.
Rather than focusing on the average rate of return as is generally done in the literature, it shifts focus
to the rate of return of the marginal R&D project funded. A great advantage of the model is that it
defines underinvestment in agricultural R&D unambiguously. To estimate the underinvestment gap,
only three parameters are needed: (a) the social cutoff rate; (b) the ex ante, implicit cutoff rate; and (c)
the slope coefficient of the ranked distribution. The first parameter is set outside the model, but the
latter two have to be estimated. Taking less than full information and compromised economic
rationality into account, these latter two can, under rather restrictive but plausible assumptions, be
derived from a sufficiently large and representative sample of ex post rates of return on agricultural
R&D. The most important findings of the model are:

• Not the mean but the mode of the ex post rate-of-return distribution is the relevant variable for
assessing underinvestment in agricultural R&D.

• Under the assumption of full information and economic rationality, developed countries could
have invested about 40% more in public agricultural R&D and developing countries about
135% more. In terms of agricultural R&D intensity (i.e., expenditures as a percentage of

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