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Competitive Experimentation with Private Information

We study a winner-take-all R&D race where firms are privately informed about the uncertain arrival rate of the invention. Due to the interdependent-value nature of the problem, the equilibrium displays a strong herding effect that distinguishes our framework from war-of-attrition models. Nonetheless, equilibrium expenditure in R&D is sub-optimal when the planner is sufficiently impatient. Pessimistic firms prematurely exit the race, so that the expected discounted amount of R&D activity is inefficiently low. This result stands in contrast to the overinvestment in research that is typical of winner-take-all R&D races without private information. We conclude that secrecy in R&D inefficiently slows down the pace of innovation.

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Paper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 1489.

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Length: 44 pages
Date of creation: Oct 2004
Date of revision:
Publication status: Published in Journal of Economic Theory (March 2010), 145(2): 639-660
Handle: RePEc:cwl:cwldpp:1489
Note: CFP 1296
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