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

  • Enrique Schroth
  • Dezsö Szalay

This paper studies the impact of financing constraints in patent races. We develop a model of optimal contracting where firms finance their R&D expenditures with an investor who cannot verify their effort. In equilibrium, firms are more likely to win the more cash and assets they hold prior to the race, and the less cash and assets their rivals hold prior to the race. Evidence from US pharmaceutical patents awarded between 1975 and 1999 supports our theoretical predictions. Copyright 2010, Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/rof/rfp020
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Article provided by European Finance Association in its journal Review of Finance.

Volume (Year): 14 (2010)
Issue (Month): 1 ()
Pages: 73-118

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Handle: RePEc:oup:revfin:v:14:y:2010:i:1:p:73-118
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