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Competitive Experimentation with Private Information

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Abstract

We study a winner-take-all R&D race where firms are privately informed about the uncertain arrival rate of the invention. Due to the interdependent-value nature of the problem, the equilibrium displays a strong herding effect that distinguishes our framework from war-of-attrition models. Nonetheless, equilibrium expenditure in R&D is sub-optimal when the planner is sufficiently impatient. Pessimistic firms prematurely exit the race, so that the expected discounted amount of R&D activity is inefficiently low. This result stands in contrast to the overinvestment in research that is typical of winner-take-all R&D races without private information. We conclude that secrecy in R&D inefficiently slows down the pace of innovation.

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Bibliographic Info

Paper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 1489.

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Length: 44 pages
Date of creation: Oct 2004
Date of revision:
Publication status: Published in Journal of Economic Theory (March 2010), 145(2): 639-660
Handle: RePEc:cwl:cwldpp:1489

Note: CFP 1296
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Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA

Related research

Keywords: R&D; experimentation; innovation; private information; herding;

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Cited by:
  1. Sven Rady & Godfrey Keller, 2007. "Strategic Experimentation with Poisson Bandits," 2007 Meeting Papers 332, Society for Economic Dynamics.
  2. Dinah Rosenberg & Eilon Solan & Nicolas Vieille, 2007. "Social Learning in One-Arm Bandit Problems," Econometrica, Econometric Society, vol. 75(6), pages 1591-1611, November.
  3. Nicolas Klein & Sven Rady, 2008. "Negatively Correlated Bandits," Working Papers 040, Bavarian Graduate Program in Economics (BGPE).
  4. Daron Acemoglu & Ufuk Akcigit, 2006. "State-Dependent Intellectual Property Rights Policy," NBER Working Papers 12775, National Bureau of Economic Research, Inc.
  5. Francisco Ruiz-Aliseda & Jianjun Wu, 2007. "Irreversible investment in stochastically cyclical markets," Economics Working Papers 1018, Department of Economics and Business, Universitat Pompeu Fabra.
  6. Dinah Rosenberg & Eilon Solan & Nicolas Vieille, 2004. "Timing Games with Informational Externalities," Levine's Working Paper Archive 122247000000000704, David K. Levine.
  7. Francis Bloch & Simona Fabrizi & Steffen Lippert, 2011. "Learning and Collusion in New Markets with Uncertain Entry Costs," Working Papers hal-00639049, HAL.
  8. Dinah Rosenberg & Antoine Salomon & Nicolas Vieille, 2010. "On Games of Strategic Experimentation," Working Papers hal-00579613, HAL.

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