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'Reverse Hysteresis': R&D Investment with Stochastic Innovation

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  • Weeds, H.

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.

Suggested Citation

  • Weeds, H., 1999. "'Reverse Hysteresis': R&D Investment with Stochastic Innovation," The Warwick Economics Research Paper Series (TWERPS) 578, University of Warwick, Department of Economics.
    • Handle: RePEc:wrk:warwec:578
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    File URL: https://warwick.ac.uk/fac/soc/economics/research/workingpapers/2008/twerp578.pdf
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    References listed on IDEAS

    as
    1. Pindyck, Robert S., 1993. "Investments of uncertain cost," Journal of Financial Economics, Elsevier, vol. 34(1), pages 53-76, August.
    2. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    3. Partha Dasgupta & Joseph Stiglitz, 1980. "Uncertainty, Industrial Structure, and the Speed of R&D," Bell Journal of Economics, The RAND Corporation, vol. 11(1), pages 1-28, Spring.
    4. Avinash Dixit, 1988. "A General Model of R&D Competition and Policy," RAND Journal of Economics, The RAND Corporation, vol. 19(3), pages 317-326, Autumn.
    5. 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.
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    7. Glenn C. Loury, 1979. "Market Structure and Innovation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 93(3), pages 395-410.
    8. Robert McDonald & Daniel Siegel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 101(4), pages 707-727.
    9. Tom Lee & Louis L. Wilde, 1980. "Market Structure and Innovation: A Reformulation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 94(2), pages 429-436.
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    Cited by:

    1. Sendstad, Lars Hegnes & Chronopoulos, Michail, 2017. "Strategic Technology Switching under Risk Aversion and Uncertainty," Discussion Papers 2017/10, Norwegian School of Economics, Department of Business and Management Science.
    2. Edson Gonçalves, 2006. "Prospecção Para Biodiversidade: Uma Abordagem Via Opções Reais," Anais do XXXIV Encontro Nacional de Economia [Proceedings of the 34th Brazilian Economics Meeting] 112, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics].
    3. Giovanni Villani, 2008. "An R&D Investment Game under Uncertainty in Real Option Analysis," Computational Economics, Springer;Society for Computational Economics, vol. 32(1), pages 199-219, September.
    4. 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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    More about this item

    Keywords

    RESEARCH AND DEVELOPMENT ; INVESTMENTS ; BEHAVIOUR;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • 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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