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Startups and Upstarts: Disadvantageous Information in R&D

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  • Yu Awaya
  • Vijay Krishna

Abstract

We study an R&D race between an established firm and a startup under asymmetric information. R&D investment brings success stochastically, but only if the innovation is feasible. The only asymmetry is that the established firm has better information about the feasibility of the innovation. We show that there is an equilibrium in which the poorly informed startup wins more often, and has higher expected profits, than the better-informed incumbent. When the informational asymmetry is large, this is the unique equilibrium outcome. The channel by which better information becomes a competitive disadvantage appears to be new and stems from the fact that better information dulls the incentive to learn from one’s rival.

Suggested Citation

  • Yu Awaya & Vijay Krishna, 2021. "Startups and Upstarts: Disadvantageous Information in R&D," Journal of Political Economy, University of Chicago Press, vol. 129(2), pages 534-569.
    • Handle: RePEc:ucp:jpolec:doi:10.1086/711953
    DOI: 10.1086/711953
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    Cited by:

    1. Ploypailin Kijkasiwat & Hamza Almustafa & Pongsutti Phuensane, 2023. "Initial coin offerings for business: a systematic literature review and bibliometric analysis," SN Business & Economics, Springer, vol. 3(1), pages 1-31, January.
    2. Chen, Chia-Hui & Ishida, Junichiro & Mukherjee, Arijit, 2023. "Pioneer, early follower or late entrant: Entry dynamics with learning and market competition," European Economic Review, Elsevier, vol. 152(C).

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