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Optimal R&D Investments of the Firm

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Author Info

  • Kort, P.M.

    (Tilburg University, Center for Economic Research)

Abstract

This paper examines irreversible decisions on innovative activities where it takes time to complete an R&D project. The totala mountof R&D investments that the firm needs to undertake in order to obtain the breakthrough in the innovation process is uncertain. R&D investments are limited by the restriction that they must be self-financed. It is shown that R&D investmentsar e morev aluable when the level of uncertainty is large. Especially, it is very attractive to undertake R&D investments if a project faces many uncertainties during its ea rly phases. Furthermore we study how R&D behavior is inuenced by different levels of the discount rate and the financing limit. Moreover, the effects of R&D subsidies, spillover benefirts and a payoff that decreases over time are analyzed.

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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 1996-47.

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Date of creation: 1996
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Handle: RePEc:dgr:kubcen:199647

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Web page: http://center.uvt.nl

Related research

Keywords: research and development; investment; uncertainty;

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References

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  1. Grossman, Gene M & Helpman, Elhanan, 1990. "Trade, Innovation, and Growth," American Economic Review, American Economic Association, vol. 80(2), pages 86-91, May.
  2. Reinganum, Jennifer F, 1985. "Innovation and Industry Evolution," The Quarterly Journal of Economics, MIT Press, vol. 100(1), pages 81-99, February.
  3. Gene M. Grossman & Carl Shapiro, 1986. "Optimal Dynamic R&D Programs," RAND Journal of Economics, The RAND Corporation, vol. 17(4), pages 581-593, Winter.
  4. Gene M. Grossman & Elhanan Helpman, 1989. "Quality Ladders in the Theory of Growth," NBER Working Papers 3099, National Bureau of Economic Research, Inc.
  5. Vesa Kanniainen, 1993. "Optimal production of innovations under uncertainty," Journal of Economics, Springer, vol. 57(2), pages 147-168, June.
  6. Geroski, P A, 1992. "Vertical Relations between Firms and Industrial Policy," Economic Journal, Royal Economic Society, vol. 102(410), pages 138-47, January.
  7. Romer, Paul M, 1990. "Endogenous Technological Change," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages S71-102, October.
  8. Paul Romer, 1990. "Are Nonconvexities Important For Understanding Growth?," NBER Working Papers 3271, National Bureau of Economic Research, Inc.
  9. Pindyck, Robert S., 1993. "Investments of uncertain cost," Journal of Financial Economics, Elsevier, vol. 34(1), pages 53-76, August.
  10. Saman Majd & Robert S. Pindyck, 1985. "Time to Build, Option Value, and Investment Decisions," NBER Working Papers 1654, National Bureau of Economic Research, Inc.
  11. Reinganum, Jennifer F, 1982. "A Dynamic Game of R and D: Patent Protection and Competitive Behavior," Econometrica, Econometric Society, vol. 50(3), pages 671-88, May.
  12. Dosi, Giovanni, 1988. "Sources, Procedures, and Microeconomic Effects of Innovation," Journal of Economic Literature, American Economic Association, vol. 26(3), pages 1120-71, September.
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Cited by:
  1. Navas, Jorge & Kort, Peter M., 2007. "Time to complete and research joint ventures: A differential game approach," Journal of Economic Dynamics and Control, Elsevier, vol. 31(5), pages 1672-1696, May.
  2. Ruslan Lukach & Peter M. Kort & Joseph Plasmans, 2005. "Optimal R&D Investment Strategies with Quantity Competition under the Threat of Superior Entry," CESifo Working Paper Series 1385, CESifo Group Munich.

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