Working Paper: CEPR ID: DP3450
Authors: Heiko Gerlach; Thomas Roende; Konrad O. Stahl
Abstract: We endogenize the market risk (at given technical risk) in firms? R&D decisions by introducing stochastic R&D in the Hotelling model. It is shown that if the technical risk is sufficiently high, the market risk remains low even if firms pursue similar projects. This leads firms to focus on the most valuable market segment. We then also endogenize technical risk by allowing firms to choose their R&D technology. In equilibrium, firms either pursue similar (different) R&D projects with risky (safe) technologies or they choose the same project but apply different R&D technologies. We show that R&D spillovers lead to more differentiated R&D efforts and patent protection to less. Project coordination within a RJV implies more differentiation, and may, or may not be welfare-improving.
Keywords: market risk; R&D project choice; technical risk
JEL Codes: D81; L13; O32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| high technical risk (O33) | low market risk (G19) |
| low market risk (G19) | firms concentrate on valuable market segments (L10) |
| high technical risk (O33) | firms concentrate on valuable market segments (L10) |
| more technical risk (O30) | less coordination on project choices (D79) |
| R&D spillovers (O36) | differentiation (J62) |
| patent protection (O34) | differentiation (J62) |