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R&D incentives with uncertain probability of success

Chatterjee, Rittwik and Chattopadhyay, Srobonti and Kabiraj, Tarun (2020): R&D incentives with uncertain probability of success.

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Abstract

A firm’s decision to invest in R&D depends on a number of factors like availability of funds, extent of R&D spillovers, market structure, and success probability. However, probability of success depends, to a large extent, on factors endogenous to a firm. This means, success probability can be known to the firm undertaking R&D investment, not to the rivals, hence there is incomplete information about probability of success in R&D. There are also uncertainties about rival’s R&D decision and R&D status. In a duopoly we show that there is a non-monotone relation between R&D incentives and the level of information.

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