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

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  • Erkal, Nisvan
  • Scotchmer, Suzanne

Abstract

We investigate optimal rewards in an R&D 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 investigate the optimal policy 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 Berkeley Olin Program in Law & Economics in its series Berkeley Olin Program in Law & Economics, Working Paper Series with number qt74c709qr.

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Date of creation: 01 May 2009
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Handle: RePEc:cdl:oplwec:qt74c709qr

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Keywords: Scarce ideas; imagination; innovation; real options; search models; rewards to R unknown hazard rate;

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References

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  1. 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.
  2. Ted O'Donoghue & Suzanne Scotchmer & Jacques-François Thisse, 1998. "Patent Breadth, Patent Life, and the Pace of Technological Progress," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 7(1), pages 1-32, 03.
  3. Nisvan Erkal, 2003. "The Decision to Patent, Cumulative Innovation,and Optimal Policy," Department of Economics - Working Papers Series 877, The University of Melbourne.
  4. Weeds, H., 2000. "Strategic Delay in a Real Optimna Model of R&D Competition," The Warwick Economics Research Paper Series (TWERPS) 576, University of Warwick, Department of Economics.
  5. 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.
  6. repec:fth:coluec:549 is not listed on IDEAS
  7. 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.
  8. Erkal, Nisvan & Scotchmer, Suzanne, 2007. "Scarcity of Ideas and Options to Invest in R&D," Competition Policy Center, Working Paper Series qt4s01d7md, Competition Policy Center, Institute for Business and Economic Research, UC Berkeley.
  9. Choi, J.P., 1991. "Dynamic R & D Competition Under "Hazard Rate" Uncertainty," Discussion Papers 1991_10, Columbia University, Department of Economics.
  10. 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.
  11. 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.
  12. Matthew Mitchell, 2000. "Rewarding Sequential Innovators: Patents Prizes and Buyouts," Econometric Society World Congress 2000 Contributed Papers 1650, Econometric Society.
  13. 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.
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Citations

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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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