Innovation, Competition, and Investment Timing

Review of Corporate Finance Studies, Forthcoming

Boston U. School of Management Research Paper No. 2012-25

45 Pages Posted: 29 Sep 2012 Last revised: 6 May 2016

See all articles by Yrjo Koskinen

Yrjo Koskinen

Haskayne School of Business, University of Calgary

Joril Maeland

NHH Norwegian School of Economics - Department of Finance

Date Written: November 26, 2015

Abstract

In our model multiple innovators compete against each other by submitting investment proposals to an investor. The investor chooses the least expensive proposal and the timing of the investment. Innovators have to provide costly, but observable effort and they learn privately the cost of investing. The investor has to compensate the innovators for their effort costs, but competition helps to erode innovators' informational rents. Consequently, competition leads to faster innovation, because the investor has less need to delay expensive investments. With endogenous number of innovators investment timing becomes first-best. When we introduce private benefits for winning the competition, innovators have an incentive to understate the investment costs. When private benefits are large the investor may have to counter this by delaying the timing of inexpensive investments.

Keywords: Real options, Investment timing, Adverse selection, Incentives, Innovation Auctions

JEL Classification: D44, D82, G24, G31, O31, O32

Suggested Citation

Koskinen, Yrjo J and Maeland, Joril, Innovation, Competition, and Investment Timing (November 26, 2015). Review of Corporate Finance Studies, Forthcoming; Boston U. School of Management Research Paper No. 2012-25 . Available at SSRN: https://ssrn.com/abstract=2153713 or http://dx.doi.org/10.2139/ssrn.2153713

Yrjo J Koskinen

Haskayne School of Business, University of Calgary ( email )

SH 154, 2500 University Drive NW
Calgary, Alberta T2N 1N4
Canada
+1-403-220-5540 (Phone)

HOME PAGE: http://haskayne.ucalgary.ca/haskayne_info/profiles/yrjo-koskinen

Joril Maeland (Contact Author)

NHH Norwegian School of Economics - Department of Finance ( email )

Helleveien 30
N-5045 Bergen
Norway

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