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‘Reverse Hysteresis’: R&D Investment With Stochastic Innovation

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  • Weeds, Helen

Abstract

We consider optimal investment behavior for a firm facing both technological and economic uncertainty, in the context of a research project with unpredictable outcomes. The optimal investment strategy, in the form of a pair of trigger points for investment and abandonment, is derived. As in Dixit (1989), the investment trigger exceeds the Marshallian investment point. However the abandonment trigger may exceed the Marshallian exit point, in contrast to the Dixit result, giving rise to ‘reverse hysteresis.’ Thus the firm tends to abandon research rapidly as profitability declines, at times despite the existence of positive expected profits. The model also provides a unified framework encompassing two existing models as limiting cases.

Suggested Citation

  • Weeds, Helen, 1999. "‘Reverse Hysteresis’: R&D Investment With Stochastic Innovation," Economic Research Papers 269349, University of Warwick - Department of Economics.
    • Handle: RePEc:ags:uwarer:269349
    DOI: 10.22004/ag.econ.269349
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    References listed on IDEAS

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    1. Reinganum, Jennifer F, 1983. "Uncertain Innovation and the Persistence of Monopoly," American Economic Review, American Economic Association, vol. 73(4), pages 741-748, September.
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    Cited by:

    1. Sendstad, Lars Hegnes & Chronopoulos, Michail, 2021. "Strategic technology switching under risk aversion and uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 126(C).

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