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Starting an R&D project under uncertainty

  • S. DOBBELAERE
  • R. I. LUTTENS

    ()

  • B. PETERS

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.

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Paper provided by Ghent University, Faculty of Economics and Business Administration in its series Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium with number 09/585.

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Length: 27 pages
Date of creation: May 2009
Date of revision:
Handle: RePEc:rug:rugwps:09/585
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Web page: http://www.ugent.be/eb

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  1. Lukach, R. & Kort, P.M. & Plasman, J., 2005. "Optimal R&D investment strategies under the threat of new technology entry," Other publications TiSEM a471503c-0064-4d33-be7f-9, Tilburg University, School of Economics and Management.
  2. Henley, Andrew & Carruth, Alan & Dickerson, Andy, 2003. "Industry-wide versus firm-specific uncertainty and investment: British company panel data evidence," Economics Letters, Elsevier, vol. 78(1), pages 87-92, January.
  3. John Van Reenen & Nick Bloom & Steve Bond, 2006. "Uncertainty and investment dynamics," LSE Research Online Documents on Economics 2645, London School of Economics and Political Science, LSE Library.
  4. Luigi Guiso & Giuseppe Parigi, 1999. "Investment And Demand Uncertainty," The Quarterly Journal of Economics, MIT Press, vol. 114(1), pages 185-227, February.
  5. Weeds, H., 2000. "Strategic Delay in a Real Optimna Model of R&D Competition," The Warwick Economics Research Paper Series (TWERPS) 576, University of Warwick, Department of Economics.
  6. Farzin, Y.H. & Huisman, K.J.M. & Kort, P.M., 1998. "Optimal timing of technology adoption," Other publications TiSEM b1a028c3-4f0b-4e68-981f-a, Tilburg University, School of Economics and Management.
  7. Ghosal, Vivek & Loungani, Prakash, 1996. "Product Market Competition and the Impact of Price Uncertainty on Investment: Some Evidence from US Manufacturing Industries," Journal of Industrial Economics, Wiley Blackwell, vol. 44(2), pages 217-28, June.
  8. Dorfman, Jeffrey H & Heien, Dale, 1989. "The Effects of Uncertainty and Adjustment Costs on Investment in the Almond Industry," The Review of Economics and Statistics, MIT Press, vol. 71(2), pages 263-74, May.
  9. Huizinga, John, 1993. "Inflation Uncertainty, Relative Price Uncertainty, and Investment in U.S. Manufacturing," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(3), pages 521-49, August.
  10. Robert S. Pindyck, 1992. "Investments of Uncertain Cost," NBER Working Papers 4175, National Bureau of Economic Research, Inc.
  11. Darby, Julia, et al, 1999. "The Impact of Exchange Rate Uncertainty on the Level of Investment," Economic Journal, Royal Economic Society, vol. 109(454), pages C55-67, March.
  12. Ferderer, J Peter, 1993. "The Impact of Uncertainty on Aggregate Investment Spending: An Empirical Analysis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(1), pages 30-48, February.
  13. repec:ner:tilbur:urn:nbn:nl:ui:12-74049 is not listed on IDEAS
  14. Grenadier, Steven R. & Weiss, Allen M., 1997. "Investment in technological innovations: An option pricing approach," Journal of Financial Economics, Elsevier, vol. 44(3), pages 397-416, June.
  15. repec:bla:restud:v:74:y:2007:i:2:p:391-415 is not listed on IDEAS
  16. Philippe Aghion & Nicholas Bloom & Richard Blundell & Rachel Griffith & Peter Howitt, 2002. "Competition and innovation: an inverted U relationship," IFS Working Papers W02/04, Institute for Fiscal Studies.
  17. Dasgupta, Partha & Stiglitz, Joseph, 1980. "Industrial Structure and the Nature of Innovative Activity," Economic Journal, Royal Economic Society, vol. 90(358), pages 266-93, June.
  18. John V. Leahy & Toni M. Whited, 1995. "The Effect of Uncertainty on Investment: Some Stylized Facts," NBER Working Papers 4986, National Bureau of Economic Research, Inc.
  19. John Huizinga, 1993. "Inflation uncertainty, relative price uncertainty, and investment in U.S. manufacturing," Proceedings, Federal Reserve Bank of Cleveland, pages 521-557.
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