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Optimal R&D Investments of the Firm

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  • Kort, P.M.

    (Tilburg University, Center For Economic Research)

Abstract

This paper examines irreversible decisions on innovative activities where it takes time to complete an R&D project. The totala mountof R&D investments that the firm needs to undertake in order to obtain the breakthrough in the innovation process is uncertain. R&D investments are limited by the restriction that they must be self-financed. It is shown that R&D investmentsar e morev aluable when the level of uncertainty is large. Especially, it is very attractive to undertake R&D investments if a project faces many uncertainties during its ea rly phases. Furthermore we study how R&D behavior is inuenced by different levels of the discount rate and the financing limit. Moreover, the effects of R&D subsidies, spillover benefirts and a payoff that decreases over time are analyzed.
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Suggested Citation

  • Kort, P.M., 1996. "Optimal R&D Investments of the Firm," Discussion Paper 1996-47, Tilburg University, Center for Economic Research.
    • Handle: RePEc:tiu:tiucen:76d14f32-6ec4-41a1-84e1-7c5133fa0564
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    References listed on IDEAS

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    1. Pindyck, Robert S., 1993. "Investments of uncertain cost," Journal of Financial Economics, Elsevier, vol. 34(1), pages 53-76, August.
    2. Gene M. Grossman & Carl Shapiro, 1986. "Optimal Dynamic R&D Programs," RAND Journal of Economics, The RAND Corporation, vol. 17(4), pages 581-593, Winter.
    3. Majd, Saman & Pindyck, Robert S., 1987. "Time to build, option value, and investment decisions," Journal of Financial Economics, Elsevier, vol. 18(1), pages 7-27, March.
    4. Reinganum, Jennifer F, 1982. "A Dynamic Game of R and D: Patent Protection and Competitive Behavior," Econometrica, Econometric Society, vol. 50(3), pages 671-688, May.
    5. Gene M. Grossman & Elhanan Helpman, 1991. "Quality Ladders in the Theory of Growth," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(1), pages 43-61.
    6. Vesa Kanniainen, 1993. "Optimal production of innovations under uncertainty," Journal of Economics, Springer, vol. 57(2), pages 147-168, June.
    7. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, April.
    8. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    9. Grossman, Gene M & Helpman, Elhanan, 1990. "Trade, Innovation, and Growth," American Economic Review, American Economic Association, vol. 80(2), pages 86-91, May.
    10. Geroski, P A, 1992. "Vertical Relations between Firms and Industrial Policy," Economic Journal, Royal Economic Society, vol. 102(410), pages 138-147, January.
    11. Jennifer F. Reinganum, 1985. "Innovation and Industry Evolution," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 100(1), pages 81-99.
    12. Giovanni Dosi, 2000. "Sources, Procedures, and Microeconomic Effects of Innovation," Chapters, in: Innovation, Organization and Economic Dynamics, chapter 2, pages 63-114, Edward Elgar Publishing.
    13. Kamien,Morton I. & Schwartz,Nancy L., 1982. "Market Structure and Innovation," Cambridge Books, Cambridge University Press, number 9780521293853, December.
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    Cited by:

    1. Navas, Jorge & Kort, Peter M., 2007. "Time to complete and research joint ventures: A differential game approach," Journal of Economic Dynamics and Control, Elsevier, vol. 31(5), pages 1672-1696, May.
    2. Lukach, R. & Kort, P.M. & Plasmans, J., 2007. "Optimal R&D investment strategies under the threat of new technology entry," International Journal of Industrial Organization, Elsevier, vol. 25(1), pages 103-119, February.
    3. Ruslan Lukach & Peter M. Kort & Joseph Plasmans, 2005. "Optimal R&D Investment Strategies with Quantity Competition under the Threat of Superior Entry," CESifo Working Paper Series 1385, CESifo.
    4. Whalley, A. Elizabeth, 2011. "Optimal R&D investment for a risk-averse entrepreneur," Journal of Economic Dynamics and Control, Elsevier, vol. 35(4), pages 413-429, April.

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