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Portfolio Choice in Research and Development

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  • Sudipto Bhattacharya and Dilip Mookherhee.

Abstract

We analyze the effects of a "winner-take-all" patent mechanism on the riskiness of the research strategies chosen by competing firms, as well as on the firms' incentives to duplicate research projects. Nash equilibrium choices are compared with the social optimum in a one-shot, simultaneous-move game in which competitors choose the riskiness or correlation of their research performances. We show that neither society nor firms have any preference for correlation per se, while the divergence between social and privately optimal levels of risk depends on skewness characteristics of the probability distribution over the discovery dates and on levels of risk aversion.

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Bibliographic Info

Paper provided by University of California at Berkeley in its series Research Program in Finance Working Papers with number 147.

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Date of creation: 01 Dec 1984
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Handle: RePEc:ucb:calbrf:147

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Postal: University of California at Berkeley, Berkeley, CA USA
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Web page: http://haas.berkeley.edu/finance/WP/rpflist.html
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Cited by:
  1. Saha, Souresh, 2014. "Firm's objective function and product and process R&D," Economic Modelling, Elsevier, vol. 36(C), pages 484-494.
  2. Jovanovic, B. & Nyarko, Y., 1996. "Research and Productivity," Working Papers 96-27, C.V. Starr Center for Applied Economics, New York University.
  3. Ozdenoren, Emre & Yuan, Kathy, 2012. "Stock Market Tournaments," CEPR Discussion Papers 9000, C.E.P.R. Discussion Papers.
  4. Bagwell, Kyle & Staiger, Robert W, 1992. "The Sensitivity of Strategic and Corrective R&D Policy in Battles for Monopoly," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 33(4), pages 795-816, November.
  5. Liad Wagman & Vincent Conitzer, 2012. "Choosing fair lotteries to defeat the competition," International Journal of Game Theory, Springer, vol. 41(1), pages 91-129, February.
  6. Kaustav Das, 2013. "Strategic Experimentation with Heterogeneous Agents and Payoff Externalities," Discussion Papers 1315, Exeter University, Department of Economics.
  7. Bhattacharya, S. & Glazer, J. & Sappington, D., 1991. "Licensing and the Sharing of Knowledge in Research Joint Ventures," Discussion Paper 1991-20, Tilburg University, Center for Economic Research.
  8. L. Lambertini & R. Orsini, 2014. "Process Innovation and Product Quality Improvement in a Dynamic Monopoly," Working Papers wp926, Dipartimento Scienze Economiche, Universita' di Bologna.

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