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Starting an R&D project under uncertainty

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  • S. DOBBELAERE
  • R. I. LUTTENS

    ()

  • B. PETERS

Abstract

We study a two-stage R&D project with an abandonment option. Two types of uncertainty influence the decision to start R&D. Demand uncertainty is modelled as a lottery between a proportional increase and decrease in demand. Technical uncertainty is modelled as a lottery between a decrease and increase in the cost to continue R&D. We relate differences in uncertainty to differences in risk premia. We deduct testable hypotheses on the basis of which we empirically analyze the impact of uncertainty on the decision to start an R&D project. Using data for about 4000 German firms in manufacturing and services (CIS IV), our model predictions are strongly confirmed.

Suggested Citation

  • S. Dobbelaere & R. I. Luttens & B. Peters, 2009. "Starting an R&D project under uncertainty," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 09/585, Ghent University, Faculty of Economics and Business Administration.
  • Handle: RePEc:rug:rugwps:09/585
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    References listed on IDEAS

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    Cited by:

    1. Sara Amoroso & Pietro Moncada-Paternò-Castello & Antonio Vezzani, 2017. "R&D profitability: the role of risk and Knightian uncertainty," Small Business Economics, Springer, vol. 48(2), pages 331-343, February.

    More about this item

    Keywords

    Investment under uncertainty; R&D; demand uncertainty; technical uncertainty; entry threat;

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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