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Innovation, Competition, and Investment Timing

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  • Koskinen, Yrjö
  • Mæland, Jøril
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    Abstract

    In our model multiple innovators compete against each other by submitting investment proposals to an investor. The investor chooses the least expensive proposal and when to invest in it. Innovators have to provide costly effort and they learn privately the cost of investing. Multiple efforts have to be compensated for, but competition helps to erode innovators' informational rents, since innovators are more likely to lose the competition if they inflate investment costs. Consequently, competition leads to faster innovation, because the investor has less of a need to delay expensive investments. The investor's payoff sensitivity also increases with competition, thus enabling the investor to capture more of the upside of innovative activity.

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    Bibliographic Info

    Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9187.

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    Date of creation: Oct 2012
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    Handle: RePEc:cpr:ceprdp:9187

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    Related research

    Keywords: Agency costs; Auctions; Innovation; Investment timing; Real options;

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