Household Innovation and R&D: Bigger than You Think

• Published date: 01 September 2021
• Author: Daniel Sichel,Eric Hippel
• Date: 01 September 2021
• DOI: http://doi.org/10.1111/roiw.12477

© 2020 The Authors. Review of Income and Wealth published by John Wiley & Sons Ltd on behalf of

International Association for Research in Income and Wealth

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HOUSEHOLD INNOVATION AND R&D: BIGGER THAN YOU THINK

by Daniel Sichel*

Wellesley College and NBER

AND

eric von hippel

MIT Sloan School of Management

Despite recent interest in measuring household activities, investment in household R&D (or household

innovation), has not been considered in any of the literatures on national-accounts-style measurement.

Household R&D is the dedication of household resources to creating a product or process that will

generate a service flow in the future; that is a household intangible asset. This paper takes a step toward

valuing household innovation in the U.S. by developing time series of nominal and real investment and

capital stocks for household R&D. We find that household investment in R&D was more than 11 per-

cent of R&D funded by the private business sector in 2017 and about half of what businesses spent on

R&D to develop new products for consumers. If household R&D were judged to be in scope for GDP,

GDP would have been 0.2 percent higher in 2017. We conclude that household R&D is important and

warrants closer attention.

JEL Codes: E22, E01, O31

Keywords: household innovation, innovation, intangible capital, research and development

1. introDuction anD overview

The rise of free goods and the digital revolution have generated new interest in

household activities and how they should be measured to best capture GDP and

social welfare.1 This renewed interest builds on earlier work on household and

non-market activities by economists and national income accountants. One import-

ant strand of this work includes valuing the time devoted to the production of

household services (such as child care and cooking) as well as the service flow from

consumer durable assets.2 Another important strand has focused on human capital

1For two recent examples, see Brynjolfsson et al. (2019) and Nakamura et al. (2017).

2Early mentions include Gilman (1898), Leontieff (1941), Marshall (1920), and Pigou (1932).

More recent work is extensive and a sample includes Bridgman (2016), Nordhaus (2006), Abraham and

Mackie (2006), Stiglitz et al. (2009), Ironmonger (2000), and Poissonnier and Roy (2017). Jorgenson

pioneered the idea of counting household purchases of durable goods as investment rather than con-

sumption. This issue is discussed in Jorgenson and Landefeld (2006), which provides an overview of the

issues surrounding the structure of National Income and Product Accounts.

Note: We thank David Byrne, Leonard Nakamura, participants in the 2019 Lisbon Meeting of the

Society of Economics of the Household, participants in the NBER Productivity Lunch, and two refer-

ees for very helpful comments.

*Correspondence to: Daniel Sichel, Wellesley College and NBER (dsichel@wellesley.edu).

Review of Income and Wealth

Series 67, Number 3, September 2021

DOI: 10.1111/roiw.12477

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Review of Income and Wealth, Series 67, Number 3, September 2021

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© 2020 International Association for Research in Income and Wealth

accumulation.3 Although household production and human capital accumulation

largely have been judged to be outside the scope of GDP (and therefore, not

included in official measures), satellite GDP accounts have provided estimates of

their value.4

While this research has provided important insights into the value of vari-

ous household activities, it misses an entire category. Namely, household research

and development (R&D) or innovation, which is neither explicitly included nor

distinguished in prior research. What is household R&D or innovation? It is the

dedication of household resources to creating a product or process that will gener-

ate a service flow to the household (and often to other households) in the future.

Accordingly, these activities lead to the accumulation of long-lived intangible capi-

tal by households. For example, an individual householder may develop a new type

of sport (say, mountain biking) or sport-related equipment for her or his own use,

and then, diffuse it to many others. Another householder, a medical patient with

a chronic disease like sleep apnea, may develop a significantly improved medical

device to manage his or her disease, and then tell others about it.

Recent research has shown household innovation (R&D) to be a significant

phenomenon.5 Nationally representative surveys, conducted in 10 nations to date,

document that, in just these ten nations, tens of millions of consumers (11.7 mil-

lion individuals in the U.S. alone) engage in household sector innovation to fill

personal needs, and collectively spend tens of billions of dollars annually on this

activity (Table1). As the table highlights, there is interesting variation across coun-

tries in the intensity of household innovation, with Russia on the high end, China

on the low end, and the United States falling in about the middle of the pack.

Despite the prevalence indicated by household surveys, household R&D

largely has, as noted, fallen between the cracks of existing work on economic mea-

surement. To see this, consider the different strands of the literature on household

activity. First, in the literature on household production, time spent developing

household R&D is considered leisure. Moreover, that literature largely focuses on

the production of services that are consumed roughly concurrently with their pro-

duction, rather than on the production of new intangible capital.

Second, in the literature on human capital, time spent developing household

R&D also would be considered non-market consumption or leisure. That classifi-

cation as consumption or leisure (rather than as an activity creating capital) occurs

both in the lifetime-income approach to measuring human capital (pioneered by

Jorgenson and Fraumeni, 1989, 1992) as well as in the cost approach (developed by

Kendrick, 1976).6 The indicators approach to measuring human capital also would

not count household R&D as investment.7

Third, the more recent literature related to the digital revolution and free

goods also largely misses household innovation. The strand of this literature

3See Jorgenson and Fraumeni (1989) and updates, including Christian (2016).

4For recent vintages of satellite accounts, see Bridgman (2016), Landefeld et al. (2009) for house-

hold production and Fraumeni et al. (2017) for human capital.

5For a review of work on household innovation see von Hippel (2017).

6In the Jorgensen-Fraumeni framework, time spent on R&D would be considered non-market

consumption, and in the Kendrick approach this time would be counted as leisure.

7See Barro and Lee (2013) for an example.