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Is the Market Biased Against Risky R&D?

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  • Tor Klette
  • David de Meza

Abstract

This article analyzes the riskiness of the R&D strategies chosen by firms engaged in a "winner-takes-all" patent race. In contradiction to Dasgupta and Stiglitz (1980) we show that, when the distribution of invention times is symmetric, the market equilibrium cannot be safer and may be riskier than is socially optimal. We identify the economic reason for the emergence but only if there are few competitors.

Suggested Citation

  • Tor Klette & David de Meza, 1986. "Is the Market Biased Against Risky R&D?," RAND Journal of Economics, The RAND Corporation, vol. 17(1), pages 133-139, Spring.
  • Handle: RePEc:rje:randje:v:17:y:1986:i:spring:p:133-139
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    Citations

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    Cited by:

    1. Kato, Atsushi, 2005. "Market structure and the allocation of R&D expenditures," Economics Letters, Elsevier, vol. 87(1), pages 55-59, April.
    2. Xing, Mingqing, 2014. "On the optimal choices of R&D risk in a market with network externalities," Economic Modelling, Elsevier, vol. 38(C), pages 71-74.
    3. Kyle Bagwell & Robert W. Staiger, 1990. "Risky R&D in Oligopolistic Product Markets," Discussion Papers 872, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    4. Igor Letina, 2013. "The road not taken: competition and the R&D portfolio," ECON - Working Papers 127, Department of Economics - University of Zurich, revised Aug 2015.
    5. Chen, Yongmin & Pan, Shiyuan & Zhang, Tianle, 2016. "Patentability, R&D direction, and cumulative innovation," MPRA Paper 73180, University Library of Munich, Germany.
    6. Isabelle Brocas, 2003. "Les enjeux de la réglementation de la recherche et développement," Revue d'économie politique, Dalloz, vol. 113(1), pages 125-148.
    7. Nisvan Erkal & Deborah Minehart, 2007. "Optimal Sharing Strategies in Dynamic Games of Research and Development," EAG Discussions Papers 200707, Department of Justice, Antitrust Division.
    8. Liad Wagman & Vincent Conitzer, 2012. "Choosing fair lotteries to defeat the competition," International Journal of Game Theory, Springer;Game Theory Society, vol. 41(1), pages 91-129, February.
    9. Bagwell, Kyle & Staiger, Robert W., 1994. "The sensitivity of strategic and corrective R&D policy in oligopolistic industries," Journal of International Economics, Elsevier, vol. 36(1-2), pages 133-150, February.
    10. 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.
    11. Bulut, Harun & Moschini, GianCarlo, 2006. "Patents, trade secrets and the correlation among R&D projects," Economics Letters, Elsevier, vol. 91(1), pages 131-137, April.
    12. Andreas Fier & Dietmar Harhoff, 2002. "Die Evolution der bundesdeutschen Forschungs- und Technologiepolitik: Rückblick und Bestandsaufnahme," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 3(3), pages 279-301, August.
    13. Axel Anderson & Luís M. B. Cabral, 2007. "Go for broke or play it safe? Dynamic competition with choice of variance," RAND Journal of Economics, RAND Corporation, vol. 38(3), pages 593-609, September.
    14. Tishler, Asher, 2008. "How risky should an R&D program be?," Economics Letters, Elsevier, vol. 99(2), pages 268-271, May.

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