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The Role of Information in Innovation and Competition

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  • Ufuk Akcigit
  • Qingmin Liu

Abstract

Innovation is typically a trial-and-error process. While some research paths lead to the innovation sought, others result in dead ends. Because firms benefit from their competitors working in the wrong direction, they do not reveal their dead-end findings. Time and resources are wasted on projects that other firms have already found to be fruitless. We offer a simple model with two firms and two research lines to study this prevalent problem. We characterize the equilibrium in a decentralized environment that necessarily entails significant efficiency losses due to wasteful dead-end replication and an information externality that leads to an early abandonment of the risky project. We show that different types of firms follow different innovation strategies and create different kinds of welfare losses. In an extension of the core model, we also study a centralized mechanism whereby firms are incentivized to disclose their actions and share their private information in a timely manner.

Suggested Citation

  • Ufuk Akcigit & Qingmin Liu, 2016. "The Role of Information in Innovation and Competition," Journal of the European Economic Association, European Economic Association, vol. 14(4), pages 828-870.
    • Handle: RePEc:oup:jeurec:v:14:y:2016:i:4:p:828-870.
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    File URL: http://hdl.handle.net/10.1111/jeea.12153
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    Cited by:

    1. Bernhard Ganglmair & Timothy Simcoe & Emanuele Tarantino, 2018. "Learning When to Quit: An Empirical Model of Experimentation," Working Papers id:12569, eSocialSciences.
    2. Song, Yangbo & Zhao, Mofei, 2021. "Dynamic R&D competition under uncertainty and strategic disclosure," Journal of Economic Behavior & Organization, Elsevier, vol. 181(C), pages 169-210.
    3. Nicholas Bloom & Charles I. Jones & John Van Reenen & Michael Webb, 2020. "Are Ideas Getting Harder to Find?," American Economic Review, American Economic Association, vol. 110(4), pages 1104-1144, April.
    4. Ufuk Akcigit & Sina T. Ates, 2021. "Ten Facts on Declining Business Dynamism and Lessons from Endogenous Growth Theory," American Economic Journal: Macroeconomics, American Economic Association, vol. 13(1), pages 257-298, January.
    5. Weshah Razzak, 2023. "Research Effort and Economic Growth," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 14(3), pages 2318-2340, September.
    6. Lu Tan & Jingsong Pei, 2023. "Open Government Data and the Urban–Rural Income Divide in China: An Exploration of Data Inequalities and Their Consequences," Sustainability, MDPI, vol. 15(13), pages 1-18, June.
    7. Margaria, Chiara, 2020. "Learning and payoff externalities in an investment game," Games and Economic Behavior, Elsevier, vol. 119(C), pages 234-250.
    8. Xuemeng Guo & Ke Guo & Hanzhong Zheng, 2023. "Industrial Agglomeration and Enterprise Innovation Sustainability: Empirical Evidence from the Chinese A-Share Market," Sustainability, MDPI, vol. 15(15), pages 1-26, July.
    9. Johannes Hoelzemann & Nicolas Klein, 2021. "Bandits in the lab," Quantitative Economics, Econometric Society, vol. 12(3), pages 1021-1051, July.
    10. Joshua L. Krieger, 2021. "Trials and Terminations: Learning from Competitors’ R&D Failures," Management Science, INFORMS, vol. 67(9), pages 5525-5548, September.
    11. Liu, Rui & Zheng, Linhao & Chen, Zheang & Cheng, Mengyao & Ren, Yuzhuo, 2024. "Digitalization through supply chains: Evidence from the customer concentration of Chinese listed companies," Economic Modelling, Elsevier, vol. 134(C).
    12. Ozili, Peterson K, 2023. "Determinants of interest in eNaira and financial inclusion information in Nigeria: role of Fintech, cryptocurrency and central bank digital currency," MPRA Paper 115990, University Library of Munich, Germany.
    13. Ozili, Peterson K, 2023. "Determinants of interest in eNaira and financial inclusion information in Nigeria: role of Fintech, cryptocurrency and central bank digital currency," MPRA Paper 116405, University Library of Munich, Germany.
    14. Chen, Mengtao, 2024. "ESG performance and firm misconduct: Evidence from R&D manipulation," Economics Letters, Elsevier, vol. 237(C).
    15. Bloch, Francis & Fabrizi, Simona & Lippert, Steffen, 2022. "Hiding and herding in market entry," Journal of Economic Theory, Elsevier, vol. 206(C).
    16. Sadler, Evan, 2021. "Dead ends," Journal of Economic Theory, Elsevier, vol. 191(C).
    17. Mayskaya, Tatiana & Nikandrova, Arina, 2023. "The dark side of transparency: When hiding in plain sight works," Journal of Economic Theory, Elsevier, vol. 212(C).

    More about this item

    JEL classification:

    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • 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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