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The B.E. Journal of Theoretical Economics

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Fundamental and Secondary R&D Races

Sayed A Hussain1

1Babson College,

Citation Information: Topics in Theoretical Economics. Volume 6, Issue 1, Pages 1–20, ISSN (Online) 1534-598X, DOI: 10.2202/1534-598X.1301, October 2006

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R&D is typically characterized by uncertainty about the existence and timing of the innovation (“fundamental R&D"). I show that these uncertainties dampen R&D investment, which may exhibit non-monotonic dynamics, possibly converging to a steady state level. In fundamental R&D, increased rivalry raises investment in the short run, but dampens it in the long run. With an endogenous market structure and free entry, perfect competition ensues, where the race lasts for an instant; with costly entry, firms engage in R&D only if they’re sufficiently optimistic that the innovation exists. Previous models of R&D races, which assume timing uncertainty (“secondary R&D"), are special cases of this model, which allows for a comparative analysis of fundamental and secondary R&D race environments.

Keywords: R&D; hazard rate; innovation existence uncertainty; timing uncertainty; R&D investment; fundamental R&D

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