Experimentation in Dynamic R&D Competition
19 Pages Posted: 21 Feb 2019
Date Written: February 4, 2019
We study a two-stage, winner-takes-all, R&D race, in which, at the outset, firms are uncertain regarding the viability of the project. Learning through experimentation introduces a bilateral (dynamic) feedback mechanism. For relatively low-value products, the equilibrium stopping time coincides with the socially efficient stopping time although firms might experiment excessively in equilibrium; for relatively high-value products, firms might reduce experimentation and stop rather prematurely due to the fundamental free-riding effect. Perhaps surprisingly, a decrease in the value of the product can spur experimentation.
Keywords: Experimentation, learning, dynamic R&D competition, inefficiency
JEL Classification: C73, D83, O31, O32
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