Direction of Innovation

Posted: 18 Oct 2013

See all articles by Kevin Bryan

Kevin Bryan

University of Toronto - Strategic Management

Jorge Lemus

University Of Illinois Urbana Champaign

Date Written: October 1, 2013

Abstract

The efficient rate of inventive activity is well-studied in models where only one invention follows the previous one; less understood is the efficient choice of which project to work on when there is a network of inventions. We present a general and tractable model of the direction of innovation, and fully characterize social optima and firm equilibria. Even when firms exert the proper amount of total effort on R&D, competition can distort the choice of direction. Socially inefficient direction choice can be explained by three interacting effects: firms can free ride on future potential inventions made possible by other firms, so they only maximize payoffs in excess of that free riding; firms do not fully account for the value of future research lines they make possible; and firms do not fully account for the time at which they make available future research lines. As an application, we show that strong patents for pioneer inventors cannot fully fix these inefficiencies. When multiple projects are available, strong pioneer patents instead can encourage firms to make technological achievements as fast as possible, rather than in the manner most conducive to future development.

Keywords: Direction, Innovation, Intellectual property, R&D, competition

Suggested Citation

Bryan, Kevin and Lemus, Jorge, Direction of Innovation (October 1, 2013). Available at SSRN: https://ssrn.com/abstract=2341381 or http://dx.doi.org/10.2139/ssrn.2341381

Kevin Bryan

University of Toronto - Strategic Management ( email )

Canada

Jorge Lemus (Contact Author)

University Of Illinois Urbana Champaign ( email )

1407 Gregory Drive, DKH 214
Urbana, IL 61801
United States

HOME PAGE: http://sites.google.com/site/jorgelemuswebsite/

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