Scarcity of Ideas and R&D Options: Use It, Lose It, or Bank It
University of Melbourne - Department of Economics
University of California - Department of Economics ; School of Law, University of California, Berkeley; National Bureau of Economic Research (NBER)
November 27, 2010
Gruter Institute Squaw Valley Conference – Innovation and Economic Growth, 2010
We investigate optimal rewards in an R&D model where substitute ideas for innovation arrive to random recipients at random times. By foregoing investment in a current idea, society as a whole preserves an option to invest in a better idea for the same market niche, but with delay. Because successive ideas may occur to different people, there is a conflict between private and social optimality. We investigate the optimal policy when the social planner learns over time about the arrival rate of ideas, and when private recipients of ideas can bank their ideas for future use. We argue that private incentives to create socially valuable options can be achieved by giving higher rewards where "ideas are scarce."
Number of Pages in PDF File: 34
Keywords: Scarce ideas, imagination, innovation, real options, search models, rewards to R&D, unknown hazard rate
JEL Classification: O34, K00, L00
Date posted: April 22, 2009 ; Last revised: February 17, 2011
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