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Scarcity of Ideas and R&D Options: Use it, Lose it or Bank it

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  • Scotchmer, Suzanne
  • Erkal, Nisvan

Abstract

We investigate rewards to R&D in a model where substitute ideas for innovation arrive to random recipients at random times. By foregoing investment in a current idea, society as a whole preserves an option to invest in a better idea for the same market niche, but with delay. Because successive ideas may occur to different people, there is a conflict between private and social optimality. We characterize the welfare-maximizing reward structure when the social planner learns over time about the arrival rate of ideas, and when private recipients of ideas can bank their ideas for future use. We argue that private incentives to create socially valuable options can be achieved by giving higher rewards where "ideas are scarce."

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Paper provided by Department of Economics, Institute for Business and Economic Research, UC Berkeley in its series Department of Economics, Working Paper Series with number qt1295k6gg.

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Date of creation: 12 Aug 2009
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Handle: RePEc:cdl:econwp:qt1295k6gg

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  1. Jay P. Choi, 1991. "Dynamic R&D Competition under "Hazard Rate" Uncertainty," RAND Journal of Economics, The RAND Corporation, vol. 22(4), pages 596-610, Winter.
  2. Reinganum, Jennifer F., 1989. "The timing of innovation: Research, development, and diffusion," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 14, pages 849-908 Elsevier.
  3. Weeds, Helen, 2002. "Strategic Delay in a Real Options Model of R&D Competition," Review of Economic Studies, Wiley Blackwell, vol. 69(3), pages 729-47, July.
  4. Erkal, Nisvan, 2005. "The decision to patent, cumulative innovation, and optimal policy," International Journal of Industrial Organization, Elsevier, vol. 23(7-8), pages 535-562, September.
  5. Hugo Hopenhayn & Gerard Llobet & Matthew Mitchell, 2006. "Rewarding Sequential Innovators: Prizes, Patents, and Buyouts," Journal of Political Economy, University of Chicago Press, vol. 114(6), pages 1041-1068, December.
  6. Vincenzo Denicolo & Luigi Alberto Franzoni, 2004. "Patents, Secrets, and the First-Inventor Defense," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 13(3), pages 517-538, 09.
  7. Erkal, Nisvan & Scotchmer, Suzanne, 2007. "Scarcity of Ideas and Options to Invest in R&D," Department of Economics, Working Paper Series qt2hq9s5kg, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  8. Matthew Mitchell, 2000. "Rewarding Sequential Innovators: Patents Prizes and Buyouts," Econometric Society World Congress 2000 Contributed Papers 1650, Econometric Society.
  9. Wright, Brian Davern, 1983. "The Economics of Invention Incentives: Patents, Prizes, and Research Contracts," American Economic Review, American Economic Association, vol. 73(4), pages 691-707, September.
  10. repec:fth:coluec:549 is not listed on IDEAS
  11. O'DONOGHUE, Ted & SCOTCHMER, Suzanne & THISSE, Jacques-François, . "Patent breadth, patent life, and the pace of technological progress," CORE Discussion Papers RP -1314, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  12. McDonald, Robert & Siegel, Daniel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, MIT Press, vol. 101(4), pages 707-27, November.
  13. David A. Malueg & Shunichi O. Tsutsui, 1997. "Dynamic R&D Competition with Learning," RAND Journal of Economics, The RAND Corporation, vol. 28(4), pages 751-772, Winter.
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Cited by:
  1. Suzanne Scotchmer, 2013. "Patents in the University: Priming the Pump and Crowding Out," NBER Working Papers 19252, National Bureau of Economic Research, Inc.
  2. Christian Riis & Xianwen Shi, 2012. "Sequential Innovation and Optimal Patent Design," Working Papers tecipa-447, University of Toronto, Department of Economics.
  3. Zhang, Tianle, 2012. "Patenting in the shadow of independent discoveries by rivals," International Journal of Industrial Organization, Elsevier, vol. 30(1), pages 41-49.
  4. Suzanne Scotchmer, 2011. "Comment on "Funding Scientific Knowledge: Selection, Disclosure and the Public-Private Portfolio"," NBER Chapters, in: The Rate and Direction of Inventive Activity Revisited, pages 103-105 National Bureau of Economic Research, Inc.

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