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

35 Pages Posted: 12 May 2009  

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: May 2009

Abstract

We investigate rewards to R&D in a 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 characterize the welfare-maximizing reward structure 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."

Suggested Citation

Erkal, Nisvan and Scotchmer, Suzanne, Scarcity of Ideas and R&D Options: Use it, Lose it or Bank it (May 2009). NBER Working Paper No. w14940. Available at SSRN: https://ssrn.com/abstract=1401785

Nisvan Erkal

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 (Contact Author)

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)

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Cambridge, MA 02138
United States

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