Innovation, Competition, and Investment Timing
Boston University - School of Management; Centre for Economic Policy Research (CEPR)
NHH Norwegian School of Economics - Department of Finance
September 25, 2012
Boston U. School of Management Research Paper No. 2012-25
In our model multiple innovators compete against each other by submitting investment proposals to an investor. The investor chooses the least expensive proposal and when to invest in it. Innovators have to provide costly effort and they learn privately the cost of investing. Multiple efforts have to be compensated for, but competition helps to erode innovators' informational rents, since innovators are more likely to lose the competition if they inflate investment costs. Consequently, competition leads to faster innovation, because the investor has less of a need to delay expensive investments. The investor's payoff sensitivity also increases with competition, thus enabling the investor to capture more of the upside of innovative activity.
Number of Pages in PDF File: 47
Keywords: Real options, Investment timing, Agency, Innovation, Auctions
JEL Classification: D44, D82, G24, G31, O31, O32working papers series
Date posted: September 29, 2012 ; Last revised: June 10, 2013
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