R&D, Free Entry, and Social Inefficiency

Economics of Innovation and New Technology, vol. 20. no.1 pp.89-101, 2011

Posted: 22 Mar 2016 Last revised: 19 Apr 2016

See all articles by Rajeev K. Goel

Rajeev K. Goel

Illinois State University - Department of Economics

Shoji Haruna

Okayama University

Date Written: 2011

Abstract

We employ a three-stage game model with cost-reducing research and development (R&D) that is subject to spillovers to consider the problem of excess entry under free-entry equilibrium relative to the social optimum. Firms choose to enter or exit a market in the first stage, choose R&D in the second stage and output in the final stage. Results show that there is socially inefficient or excessive entry in equilibrium. However, we uniquely demonstrate that research spillovers hold the key to whether established results regarding socially inefficient entry hold. Specifically, excessive entry occurs as long as research spillovers are relatively small, but this is not necessarily the case with large spillovers. Some policy implications are discussed.

Suggested Citation

Goel, Rajeev K. and Haruna, Shoji, R&D, Free Entry, and Social Inefficiency (2011). Economics of Innovation and New Technology, vol. 20. no.1 pp.89-101, 2011. Available at SSRN: https://ssrn.com/abstract=2752607

Rajeev K. Goel (Contact Author)

Illinois State University - Department of Economics ( email )

Normal, IL 61790-4200
United States

Shoji Haruna

Okayama University ( email )

1-1-1 Tsushimanaka, Kita Ward
Okayama, 700-0082
Japan

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