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Dynamic R&D Competition under "Hazard Rate" Uncertainty

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  • Jay P. Choi

Abstract

A model of dynamic R&D behavior is presented in which participants in the race have imperfect information about the (true) "hazard rate" of the R&D process. In this model, a firm will be ambivalent about a rival firm's success at an intermediate stage. On the one hand, the probability of winning is reduced, since a rival firm is ahead and the technological gap is larger. This effect is always negative. On the other hand, the discovery could be a signal that the project is not as hard after all ("If you can do that, why not me?"), which could shorten the expected time needed for the discovery. This is a positive effect of a rival firm's success, one that is not present in existing models and hence has been ignored up to now. According to the relative magnitude of these two opposing effects, a much richer description of real-world R&D behavior is obtained. This article also provides a potential explanation of the strategic practice of innovation shelving.

Suggested Citation

  • Jay P. Choi, 1991. "Dynamic R&D Competition under "Hazard Rate" Uncertainty," RAND Journal of Economics, The RAND Corporation, vol. 22(4), pages 596-610, Winter.
  • Handle: RePEc:rje:randje:v:22:y:1991:i:winter:p:596-610
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    Citations

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    Cited by:

    1. Cadot, Olivier & Desruelle, Dominique, 1998. "R&D: Who does the R, who does the D?," Journal of International Economics, Elsevier, vol. 46(1), pages 87-103, October.
    2. Helen Weeds, 2002. "Strategic Delay in a Real Options Model of R&D Competition," Review of Economic Studies, Oxford University Press, vol. 69(3), pages 729-747.
    3. Scotchmer, Suzanne & Erkal, Nisvan, 2009. "Scarcity of Ideas and R&D Options: Use it, Lose it or Bank it," Department of Economics, Working Paper Series qt1295k6gg, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    4. Ding, Haina, 2015. "Innovation strategies and stock price informativeness," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 491, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    5. Heidhues, Paul & Rady, Sven & Strack, Philipp, 2015. "Strategic experimentation with private payoffs," Journal of Economic Theory, Elsevier, vol. 159(PA), pages 531-551.
    6. Francis Bloch & Simona Fabrizi & Steffen Lippert, 2015. "Learning and collusion in new markets with uncertain entry costs," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 58(2), pages 273-303, February.
    7. Daron Acemoglu & Ufuk Akcigit, 2006. "State-Dependent Intellectual Property Rights Policy," NBER Working Papers 12775, National Bureau of Economic Research, Inc.
    8. Cary Deck & Erik O. Kimbrough, 2016. "Experimenting with Contests for Experimentation," Discussion Papers dp16-08, Department of Economics, Simon Fraser University.
    9. Moscarini, Giuseppe & Squintani, Francesco, 2010. "Competitive experimentation with private information: The survivor's curse," Journal of Economic Theory, Elsevier, vol. 145(2), pages 639-660, March.
    10. Nien-Huei Jiang, 2000. "Information Spillover and Economic Development," Vanderbilt University Department of Economics Working Papers 0030, Vanderbilt University Department of Economics.
    11. Bag, Parimal Kanti & Dasgupta, Sudipto, 1995. "Strategic R&D success announcements," Economics Letters, Elsevier, vol. 47(1), pages 17-26, January.
    12. Chang, Shun-Chiao & Wu, Ho-Mou, 2006. "Production experiences and market structure in R&D competition," Journal of Economic Dynamics and Control, Elsevier, vol. 30(2), pages 163-183, February.

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