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Scarcity of Ideas and R&D Options: Use It, Lose It, or Bank It

34 Pages Posted: 22 Apr 2009 Last revised: 17 Feb 2011

Nisvan Erkal

University of Melbourne - Department of Economics

Suzanne Scotchmer

University of California - Department of Economics ; School of Law, University of California, Berkeley; National Bureau of Economic Research (NBER)

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Date Written: November 27, 2010

Abstract

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."

Keywords: Scarce ideas, imagination, innovation, real options, search models, rewards to R&D, unknown hazard rate

JEL Classification: O34, K00, L00

Suggested Citation

Erkal, Nisvan and Scotchmer, Suzanne, Scarcity of Ideas and R&D Options: Use It, Lose It, or Bank It (November 27, 2010). Gruter Institute Squaw Valley Conference – Innovation and Economic Growth, 2010. Available at SSRN: https://ssrn.com/abstract=1393129 or http://dx.doi.org/10.2139/ssrn.1393129

Nisvan Erkal (Contact Author)

University of Melbourne - Department of Economics ( email )

Victoria, 3010
Australia
+61 3 8344 3307 (Phone)
+61 3 8344 6899 (Fax)

HOME PAGE: http://www.nisvanerkal.net

Suzanne Scotchmer

University of California - Department of Economics ( email )

Berkeley, CA 94720-3880
United States
510-643-8562 (Phone)

School of Law, University of California, Berkeley ( email )

215 Boalt Hall
Berkeley, CA 94720-7200
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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