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Cash Breeds Success : The Role of Financing Constraints in Patent Races

  • Schroth, Enrique

    (Faculty of Economics and Business, University of Amsterdam)

  • Szalay, Dezsö

    (Department of Economics, University of Warwick)

This paper studies the impact of financing constraints on the equilibrium of a patent race. We develop a model where firms finance their R&D expenditures with an investor who cannot verify their effort. We solve for the optimal financial contract of any firm along its best-response function. In equilibrium, any firm in the race is more likely to win the more cash and assets it holds prior to the race, and the less cash and assets its rivals hold prior to the race. We use NBER evidence from pharmaceutical patents awarded between 1975 and 1999 in the US, patent citations, and COMPUSTAT to measure the effect of all the racing firms' cash holdings on the equilibrium winning probabilities. The empirical findings support our theoretical predictions.

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File URL: http://www2.warwick.ac.uk/fac/soc/economics/research/workingpapers/2008/twerp_873.pdf
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Paper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 873.

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Length: 54 pages
Date of creation: 2008
Date of revision:
Handle: RePEc:wrk:warwec:873
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