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R&D investment under incomplete markets

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  • Fan Hu
  • Yaoyao Wu

Abstract

Entrepreneurs often face undiversifiable idiosyncratic risks from their R&D investments. We extend the real options model of R&D to an incomplete markets environment. We find the effect of market incompleteness on R&D investment is ambiguous. With low technological uncertainty, the agent under incomplete markets over‐investment in R&D. However, market incompleteness leads to under‐investment in R&D when the technological uncertainty is high.

Suggested Citation

  • Fan Hu & Yaoyao Wu, 2023. "R&D investment under incomplete markets," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 44(2), pages 858-861, March.
    • Handle: RePEc:wly:mgtdec:v:44:y:2023:i:2:p:858-861
    DOI: 10.1002/mde.3717
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    References listed on IDEAS

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