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

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  • Enrique Schroth
  • Dezsö Szalay

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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Bibliographic 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
Date of revision:
Handle: RePEc:lau:crdeep:05.11

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Postal: Université de Lausanne, Faculté des HEC, DEEP, Internef, CH-1015 Lausanne
Phone: ++41 21 692.33.64
Fax: ++41 21 692.33.05
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Web page: http://www.hec.unil.ch/deep/publications/cahiers/series
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Keywords: patent race; incumbent; entrant; financial constraints; empirical estimation;

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Citations

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Cited by:
  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).
  2. repec:hal:journl:halshs-00115717 is not listed on IDEAS
  3. Vesperoni , Alberto, 2013. "War Finance and the Modern State," NEPS Working Papers 6/2013, Network of European Peace Scientists.
  4. Frédérique Savignac, 2006. "The impact of financial constraints on innovation : evidence from French manufacturing firms," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00115717, HAL.
  5. Boone, J., 2006. "Firms Merge in Response to Constraints," Discussion Paper 2006-60, Tilburg University, Center for Economic Research.
  6. Kremer, Michael R., 1998. "Patent Buyouts: A Mechanism for Encouraging Innovation," Scholarly Articles 3693705, Harvard University Department of Economics.
  7. Bakker, Gerben, 2013. "Money for nothing: How firms have financed R&D-projects since the Industrial Revolution," Research Policy, Elsevier, vol. 42(10), pages 1793-1814.

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