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'Reverse Hysteresis': R&D Investment with Stochastic Innovation

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Weeds, H.

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Abstract

We consider optimal investment behavior for a firm facing both technological and economic uncertainty, in the context of a research project with unpredictable outcomes. The optimal investment strategy, in the form of a pair of trigger points for investment and abandonment, is derived. As in Dixit (1989), the investment trigger exceeds the Marshallian investment point.

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File URL: http://www2.warwick.ac.uk/fac/soc/economics/research/workingpapers/publications/twerp578.pdf
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Publisher Info
Paper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 578.

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Length: 21 pages
Date of creation: 1999
Date of revision:
Handle: RePEc:wrk:warwec:578

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Related research
Keywords: RESEARCH AND DEVELOPMENT ; INVESTMENTS ; BEHAVIOUR;

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Find related papers by JEL classification:
C61 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Optimization Techniques; Programming Models; Dynamic Analysis
D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
E22 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
O31 - Economic Development, Technological Change, and Growth - - Technological Change - - - Innovation and Invention: Processes and Incentives

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.:

  1. Pindyck, Robert S., 1993. "Investments of uncertain cost," Journal of Financial Economics, Elsevier, vol. 34(1), pages 53-76, August. [Downloadable!] (restricted)
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  2. 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. [Downloadable!] (restricted)
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  3. Avinash Dixit, 1988. "A General Model of R&D Competition and Policy," RAND Journal of Economics, The RAND Corporation, vol. 19(3), pages 317-326, Autumn. [Downloadable!] (restricted)
  4. Partha Dasgupta & Joseph Stiglitz, 1980. "Uncertainty, Industrial Structure, and the Speed of R&D," Bell Journal of Economics, The RAND Corporation, vol. 11(1), pages 1-28, Spring. [Downloadable!] (restricted)
  5. Lee, Tom & Wilde, Louis L, 1980. "Market Structure and Innovation: A Reformulation," The Quarterly Journal of Economics, MIT Press, vol. 94(2), pages 429-36, March. [Downloadable!] (restricted)
  6. Bar-Ilan, Avner & Strange, William C., 1998. "A model of sequential investment," Journal of Economic Dynamics and Control, Elsevier, vol. 22(3), pages 437-463, March. [Downloadable!] (restricted)
  7. Loury, Glenn C, 1979. "Market Structure and Innovation," The Quarterly Journal of Economics, MIT Press, vol. 93(3), pages 395-410, August. [Downloadable!] (restricted)
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  8. McDonald, Robert & Siegel, Daniel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, MIT Press, vol. 101(4), pages 707-27, November. [Downloadable!] (restricted)
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(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. Edson Gonçalves, 2006. "Prospecção Para Biodiversidade: Uma Abordagem Via Opções Reais," Anais do XXXIV Encontro Nacional de Economia [Proceedings of the 34th Brazilian Economics Meeting] 112, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics]. [Downloadable!]
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