Innovation under Ambiguity and Risk
54 Pages Posted: 2 Aug 2019 Last revised: 5 Aug 2021
Date Written: July 30, 2019
We view innovation investment as a real option and explore the implications of ambiguity (Knightian uncertainty) and risk for innovation decisions. Our analysis uses a risk measure and a new outcome-independent measure of ambiguity. We find a consistently significant negative effect of ambiguity on R&D, patents, and citations supporting our theoretical notion. We also find a significant positive effect of risk on R&D, but the effect of risk on patents and citations is negative and significant. The different nature of R&D investments versus patent investments and citations may explain this difference. Ambiguity matters more for high-tech firms, consistent with intuition.
Keywords: Ambiguity measurement, Ambiguity aversion, Risk aversion, Innovation, Patents
JEL Classification: D81, G31, O31, O32
Suggested Citation: Suggested Citation