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

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Author Info
Schroth, Enrique (Faculty of Economics and Business, University of Amsterdam)
Szalay, Dezsö (Department of Economics, University of Warwick)

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Abstract

This paper studies the impact of financing constraints on the equilibrium of a patent race. We develop a model where firms finance their R&D expenditures with an investor who cannot verify their effort. We solve for the optimal financial contract of any firm along its best-response function. In equilibrium, any firm in the race is more likely to win the more cash and assets it holds prior to the race, and the less cash and assets its rivals hold prior to the race. We use NBER evidence from pharmaceutical patents awarded between 1975 and 1999 in the US, patent citations, and COMPUSTAT to measure the effect of all the racing firms' cash holdings on the equilibrium winning probabilities. The empirical findings support our theoretical predictions.

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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 873.

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Length: 54 pages
Date of creation: 2008
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Handle: RePEc:wrk:warwec:873

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Related research
Keywords: Patent Race ; optimal contract ; innovation ; financial constraints;

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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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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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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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