Public research effects on the Canadian food processing industry: A dynamic optimization approach

With the heightened concern for efficient use of public funds it is timely to examine government's research and development (R&D) influence and involvement in the food processing sector. To analyze these effects, a dynamic optimisation model was postulated. It was assumed that technical knowledge produced by the government is a capital stock where investment in one period impacts on market behaviour in future periods. It was also assumed that processing firms were not necessarily price takers. This led to the development of a dynamic profit value function for processors which included quasi-fixed private physical and R&D capital, and public R&D capital, incorporating market power behaviour. Using the dual approach and applying Hotelling's lemma, processor instantaneous profit, factor demand and product supply functions were derived. Product demand functions, which contained both public and private R&D as exogenous variables, were estimated directly.; With these behavioral functions as constraints, it was postulated that the government objective was to optimise social surplus. Integration of the product demand curve defined consumer surplus while the instantaneous profit function derived from the processors' profit value function was defined as producer surplus. A dynamic optimisation model was developed to examine how differing levels of government investment would influence processor and consumer behaviour over time.; In general, increasing public R&D investment caused private R&D investment to expand in the six major food processing sub-sectors examined, supporting the hypothesis that public R&D does not have a "crowding out" effect. Physical capital stock and production tended to increase as a result of increasing public R&D. The net effect on processors' profit was mixed over the six sub-sectors. In some cases profits increased as a result of increased public R&D, in others profits declined supporting Cochrane's treadmill theory. The impact on consumer surplus was also mixed with two sub-sectors showing a decline when public R&D increased.