Starting an R&D Project under Uncertainty

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Starting an R&D Project under Uncertainty

Author Info

Sabien Dobbelaere () (VU University Amsterdam)
Roland Iwan Luttens (SHERPPA, Ghent University, and CORE, Université Catholique de Louvain)
Bettina Peters (Centre for European Economic Research (ZEW))

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Abstract

We study a two-stage R&D project with an abandonment option. Two types of uncertainty influence the decision to start R&D. Demand uncertainty is modelled as a lottery between a proportional increase and decrease in demand. Technical uncertainty is modelled as a lottery between a decrease and increase in the cost to continue R&D. We relate differences in uncertainty to differences in risk premia. We deduct testable hypotheses on the basis of which we empirically analyze the impact of uncertainty on the decision to start an R&D project. Using data for about 4000 German firms in manufacturing and services (CIS IV), our model predictions are strongly confirmed.

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Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 09-044/3.

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Date of creation: 15 May 2009
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Handle: RePEc:dgr:uvatin:20090044

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Paper
- S. Dobbelaere & R. I. Luttens & B. Peters, 2009. "Starting an R&D project under uncertainty," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 09/585, Ghent University, Faculty of Economics and Business Administration. [Downloadable!]

Find related papers by JEL classification:
D21 - Microeconomics - - Production and Organizations - - - Firm Behavior
D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
O31 - Economic Development, Technological Change, and Growth - - Technological Change - - - Innovation and Invention: Processes and Incentives

This paper has been announced in the following NEP Reports:

NEP-ALL-2009-07-03 (All new papers)
NEP-ENT-2009-07-03 (Entrepreneurship)
NEP-IND-2009-07-03 (Industrial Organization)
NEP-INO-2009-07-03 (Innovation)
NEP-MIC-2009-07-03 (Microeconomics)
NEP-PPM-2009-07-03 (Project, Program & Portfolio Management)
NEP-UPT-2009-07-03 (Utility Models & Prospect Theory)

References listed on IDEAS
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Other versions:
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Other versions:
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- Guiso, L. & Parigi, G., 1996. "Investment and Demand Uncertainty," Papers 289, Banca Italia - Servizio di Studi.

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