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Cash breeds Success: The Role of Financing Constraints in Patent Races

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Author Info
Enrique Schroth
Dezsö Szalay

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Abstract

This paper studies the impact of cash constraints on equilibrium winning probabilities in a patent race between an incumbent and an entrant. We develop a model where cash-constrained firms finance their R&D expenditures with an investor who cannot verify their effort. In equilibrium, the incumbent faces better prospects of winning the race the less cash-constrained he is and the more cash-constrained the entrant is. We use NBER evidence from pharmaceutical patents awarded between 1975 and 1999 in the US, patent citations, and COMPUSTAT and fit probabilistic regressions of the predicted equilibrium winning probabilities on measures of the incumbent's and potential entrants' financial wealth. The empirical findings support our theoretical predictions.

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Publisher Info
Paper provided by Université de Lausanne, Faculté des HEC, DEEP in its series Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) with number 05.11.

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Length: 48 pages
Date of creation: May 2005
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Handle: RePEc:lau:crdeep:05.11

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Postal: Université de Lausanne, Faculté des HEC, DEEP, Internef, CH-1015 Lausanne
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Related research
Keywords: patent race; incumbent; entrant; financial constraints; empirical estimation;

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Find related papers by JEL classification:
G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure
L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Frédérique Savignac, 2006. "The impact of financial constraints on innovation : evidence from french manufacturing firms," Cahiers de la Maison des Sciences Economiques v06042, Université Panthéon-Sorbonne (Paris 1). [Downloadable!]
    Other versions:
  2. Boone, J., 2006. "Firms merge in response to constraints," Discussion Paper 60, Tilburg University, Center for Economic Research. [Downloadable!]
    Other versions:
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