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Optimal R&D investments of the firm

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  • Kort, P.M.

    (Tilburg University)

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 in its series Open Access publications from Tilburg University with number urn:nbn:nl:ui:12-77109.

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Date of creation: 1998
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Publication status: Published in OR Spektrum (1998) v.20, p.155-164
Handle: RePEc:ner:tilbur:urn:nbn:nl:ui:12-77109

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Web page: http://www.tilburguniversity.edu/

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  1. Romer, Paul M, 1990. "Are Nonconvexities Important for Understanding Growth?," American Economic Review, American Economic Association, vol. 80(2), pages 97-103, May.
  2. Pindyck, Robert S., 1993. "Investments of uncertain cost," Journal of Financial Economics, Elsevier, vol. 34(1), pages 53-76, August.
  3. Romer, Paul M, 1990. "Endogenous Technological Change," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages S71-102, October.
  4. 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.
  5. Grossman, Gene M & Helpman, Elhanan, 1991. "Quality Ladders in the Theory of Growth," Review of Economic Studies, Wiley Blackwell, vol. 58(1), pages 43-61, January.
  6. Reinganum, Jennifer F, 1985. "Innovation and Industry Evolution," The Quarterly Journal of Economics, MIT Press, vol. 100(1), pages 81-99, February.
  7. Kanniainen, Vesa, 1991. "Optimal Production of Innovations Under Uncertainty," Discussion Papers 348, The Research Institute of the Finnish Economy.
  8. Gene M. Grossman & Carl Shapiro, 1985. "Optimal Dynamic R&D Programs," NBER Working Papers 1658, National Bureau of Economic Research, Inc.
  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. Grossman, G.M. & Helpman, E., 1989. "Trade; Innovation; And Growth," Papers 154, Princeton, Woodrow Wilson School - Public and International Affairs.
  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, J. & Kort, P.M., 2005. "Time to Complete and Research Joint Ventures: A Differential Game Approach," Discussion Paper 2005-29, Tilburg University, Center for Economic Research.
  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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