Asymmetric Information and R&D Competition

This paper analyses R&D competition among firms with incomplete information. In a stochastic R&D game, firms possess private information regarding their R&D progress. They can only observe the rival's R&D investments, but not its actual R&D position, R&D investments thus carry both investment and signalling effects. In this two-period model. there are two possible regimes for the second period game: the complete information regime and the signalling regime. In the signalling regime. in order to credibly convey to the rival its first period research success, the first mover has to over-invest. Both firms have higher profits in the complete information regime. The game is in the signalling regime if the difference b€tween monopoly and duopoly profit is sufficiently large and if the possibility of leapfrogging is high. For some parameter ranges, the choice of the information regime is endogenous.