Working Paper: CEPR ID: DP9187
Authors: Yrj Koskinen; Jril Mland
Abstract: In our model multiple innovators compete against each other by submitting investment proposals to an investor. The investor chooses the least expensive proposal and when to invest in it. Innovators have to provide costly effort and they learn privately the cost of investing. Multiple efforts have to be compensated for, but competition helps to erode innovators' informational rents, since innovators are more likely to lose the competition if they inflate investment costs. Consequently, competition leads to faster innovation, because the investor has less of a need to delay expensive investments. The investor's payoff sensitivity also increases with competition, thus enabling the investor to capture more of the upside of innovative activity.
Keywords: agency costs; auctions; innovation; investment timing; real options
JEL Codes: D44; D82; G24; G31; O31; O32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| competition (L13) | incentive structure (M52) |
| competition (L13) | investment timing (G11) |
| incentive structure (M52) | investment timing (G11) |
| competition (L13) | informational rents (D89) |
| informational rents (D89) | investment timing (G11) |
| competition (L13) | first-best investment policy (G11) |