The production of science

I develop a model of science production where researchers are endogenously allocated to different sectors (for profit or non profit), and to different labs. The main assumption is that firms invest in research to increase their absorptive capacity: the ability to use and understand scientific findings produced elsewhere. Firms create absorptive capacity by building labs and hiring researchers in a competitive market. Because of externalities, firms underinvest in labs. More interestingly, re- searchers and labs are substitutes in the revenue function, even though they are complements in the research production function. This implies a novel form of inefficiency: for any given investment, the allocation of researchers to firms is non optimal. I introduce into the model universities and I assume that their mission is to produce science. I show that universities attract the best researchers, and that the allocation of researchers to labs within the university system maximizes the research output.