Starting an R&D Project Under Uncertainty

Tinbergen Institute Discussion Paper 2009-044/3

29 Pages Posted: 22 May 2009

See all articles by Roland Iwan Luttens

Roland Iwan Luttens

Ghent University - Department of Social Economics

Bettina Peters

Center for European Economic Research (ZEW)

Sabien Dobbelaere

Vrije Universiteit Amsterdam - Department of Economics; Tinbergen Institute; IZA Institute of Labor Economics

Date Written: May 18, 2009

Abstract

We study a two-stage R&D project with an abandonment option. Two types of uncertainty influence the decision to start R&D. Demand uncertainty is modelled as a lottery between a proportional increase and decrease in demand. Technical uncertainty is modelled as a lottery between a decrease and increase in the cost to continue R&D. We relate differences in uncertainty to differences in risk premia. We deduct testable hypotheses on the basis of which we empirically analyze the impact of uncertainty on the decision to start an R&D project. Using data for about 4000 German firms in manufacturing and services (CIS IV), our model predictions are strongly confirmed.

Keywords: investment under uncertainty, R&D, demand uncertainty, technical uncertainty, entry threat

JEL Classification: D21, D81, L12, O31

Suggested Citation

Luttens, Roland Iwan and Peters, Bettina and Dobbelaere, Sabien, Starting an R&D Project Under Uncertainty (May 18, 2009). Tinbergen Institute Discussion Paper 2009-044/3, Available at SSRN: https://ssrn.com/abstract=1406397 or http://dx.doi.org/10.2139/ssrn.1406397

Roland Iwan Luttens

Ghent University - Department of Social Economics ( email )

Hoveniersberg 24
Gent, 9000
Belgium

Bettina Peters

Center for European Economic Research (ZEW) ( email )

P.O. Box 10 34 43
L 7,1 D-68161 Mannheim
Germany
+496211235174 (Phone)
+496211235170 (Fax)

HOME PAGE: http://www.zew.de

Sabien Dobbelaere (Contact Author)

Vrije Universiteit Amsterdam - Department of Economics ( email )

De Boelelaan 1105
NL- Amsterdam, NL-1081 HV
Netherlands
0031 20 598 28 74 (Phone)

Tinbergen Institute

Keizersgracht 482
NL- Amsterdam, NL-1017 EG
Netherlands

IZA Institute of Labor Economics

P.O. Box 7240
D- Bonn, 53072
Germany

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