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Optimal R&D Investments of the Firm

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  • 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. Reinganum, Jennifer R., . "Innovation and Industry Evolution," Working Papers 426, California Institute of Technology, Division of the Humanities and Social Sciences.
  2. 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.
  3. Grossman, G.M. & Helpman, E., 1989. "Quality Ledders In The Theory Of Growth," Papers 148, Princeton, Woodrow Wilson School - Public and International Affairs.
  4. Romer, Paul M, 1990. "Are Nonconvexities Important for Understanding Growth?," American Economic Review, American Economic Association, vol. 80(2), pages 97-103, May.
  5. Kanniainen, Vesa, 1991. "Optimal Production of Innovations Under Uncertainty," Discussion Papers 348, The Research Institute of the Finnish Economy.
  6. Pindyck, Robert S., 1993. "Investments of uncertain cost," Journal of Financial Economics, Elsevier, vol. 34(1), pages 53-76, August.
  7. Paul M Romer, 1999. "Endogenous Technological Change," Levine's Working Paper Archive 2135, David K. Levine.
  8. Dosi, Giovanni, 1988. "Sources, Procedures, and Microeconomic Effects of Innovation," Journal of Economic Literature, American Economic Association, vol. 26(3), pages 1120-71, September.
  9. Geroski, P A, 1992. "Vertical Relations between Firms and Industrial Policy," Economic Journal, Royal Economic Society, vol. 102(410), pages 138-47, January.
  10. Majd, Saman & Pindyck, Robert S., 1987. "Time to build, option value, and investment decisions," Journal of Financial Economics, Elsevier, vol. 18(1), pages 7-27, March.
  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. Grossman, Gene M & Helpman, Elhanan, 1990. "Trade, Innovation, and Growth," American Economic Review, American Economic Association, vol. 80(2), pages 86-91, May.
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Cited by:
  1. 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.
  2. Kort, P.M. & Navas, J., 2007. "Time to complete and research joint ventures: A differential game approach," Open Access publications from Tilburg University urn:nbn:nl:ui:12-194290, Tilburg University.

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