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Cash Breeds Success: The Role of Financing Constraints in Patent Races

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  • Enrique Schroth
  • Dezsö Szalay

Abstract

This paper studies the impact of financing constraints in patent races. We develop a model of optimal contracting where firms finance their R&D expenditures with an investor who cannot verify their effort. In equilibrium, firms are more likely to win the more cash and assets they hold prior to the race, and the less cash and assets their rivals hold prior to the race. Evidence from US pharmaceutical patents awarded between 1975 and 1999 supports our theoretical predictions. Copyright 2010, Oxford University Press.

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Bibliographic Info

Article provided by European Finance Association in its journal Review of Finance.

Volume (Year): 14 (2010)
Issue (Month): 1 ()
Pages: 73-118

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Handle: RePEc:oup:revfin:v:14:y:2010:i:1:p:73-118

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References

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Citations

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Cited by:
  1. Gerben Bakker, 2013. "Money for nothing: how firms have financed R&D-projects since the Industrial Revolution," Economic History Working Papers 54518, London School of Economics and Political Science, Department of Economic History.
  2. repec:hal:journl:halshs-00115717 is not listed on IDEAS
  3. Boone, J., 2006. "Firms Merge in Response to Constraints," Discussion Paper 2006-014, Tilburg University, Tilburg Law and Economic Center.
  4. repec:hal:cesptp:halshs-00115717 is not listed on IDEAS
  5. Kremer, Michael R., 1998. "Patent Buyouts: A Mechanism for Encouraging Innovation," Scholarly Articles 3693705, Harvard University Department of Economics.
  6. Frédérique Savignac, 2006. "The impact of financial constraints on innovation : evidence from french manufacturing firms," Cahiers de la Maison des Sciences Economiques v06042, Université Panthéon-Sorbonne (Paris 1).
  7. Vesperoni , Alberto, 2013. "War Finance and the Modern State," NEPS Working Papers 6/2013, Network of European Peace Scientists.

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