Working Paper: NBER ID: w14940
Authors: Nisvan Erkal; Suzanne Scotchmer
Abstract: We investigate rewards to R&D in a model where substitute ideas for innovation arrive to random recipients at random times. By foregoing investment in a current idea, society as a whole preserves an option to invest in a better idea for the same market niche, but with delay. Because successive ideas may occur to different people, there is a conflict between private and social optimality. We characterize the welfare-maximizing reward structure when the social planner learns over time about the arrival rate of ideas, and when private recipients of ideas can bank their ideas for future use. We argue that private incentives to create socially valuable options can be achieved by giving higher rewards where "ideas are scarce."
Keywords: R&D; innovation; reward structure; scarcity of ideas
JEL Codes: K00; L00; O34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| scarcity of ideas (O36) | reward structure (J33) |
| reward structure (J33) | investment behavior (G11) |
| time passes without innovation (O39) | expected arrival rate of ideas (O36) |
| expected arrival rate of ideas (O36) | willingness to tolerate higher costs (D23) |