Resource Allocation Among Competing Innovators

Abstract

Many innovative products are designed to satisfy the demand of specific target consumers, and thus innovators with new products will inevitably compete with each other in the post-innovation market. We investigate how a profit-maximizing principal should properly allocate her limited resources to support the innovations of multiple potentially competing innovators. We find that as the available resources increase, the number of agents receiving resources may first increase and then decrease. This interesting non-monotone pattern is driven by a trade-off between the risk of innovation failure and rent dissipation due to competition. The results are robust to incorporating an endogenous profit-sharing rule and costly resources. Using the framework, we also analyze a nonprofit principal seeking to maximize the total number of successful innovations, the probability of at least one innovator succeeding, consumer surplus, and total social welfare.

Keywords: innovation; competition; incentives; resource allocation