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

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  • Schroth, Enrique
  • Szalay, Dezso

Abstract

This paper studies the impact of Önancing constraints on the equilibrium of a patent race. We develop a model where Örms Önance their R&D expenditures with an investor who cannot verify their e§ort. We solve for the optimal Önancial contract of any Örm along its best-response function. In equilibrium, any Örm 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.

Suggested Citation

  • Schroth, Enrique & Szalay, Dezso, 2008. "Cash Breeds Success: The Role of Financing Constraints in Patent Races," Economic Research Papers 269884, University of Warwick - Department of Economics.
    • Handle: RePEc:ags:uwarer:269884
    DOI: 10.22004/ag.econ.269884
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    More about this item

    Keywords

    Financial Economics; Research and Development/Tech Change/Emerging Technologies;

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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