Working Paper: NBER ID: w17602
Authors: Ufuk Akcigit; Qingmin Liu
Abstract: Technological progress is typically a result of trial-and-error research by competing firms. While some research paths lead to the innovation sought, others result in dead ends. Because firms benefit from their competitors working in the wrong direction, they do not reveal their dead-end findings. Time and resources are wasted on projects that other firms have already found to be dead ends. Consequently, technological progress is slowed down, and the society benefits from innovations with delay, if ever. To study this prevalent problem, we build a tractable two-arm bandit model with two competing firms. The risky arm could potentially lead to a dead end and the safe arm introduces further competition to make firms keep their dead-end findings private. We characterize the equilibrium in this decentralized environment and show that the equilibrium necessarily entails significant efficiency losses due to wasteful dead-end replication and a flight to safety - an early abandonment of the risky project. Finally, we design a dynamic mechanism where firms are incentivized to disclose their actions and share their private information in a timely manner. This mechanism restores efficiency and suggests a direction for welfare improvement.
Keywords: R&D; innovation; information sharing; competition; dead-end research
JEL Codes: D83; D92; O31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| firms' decisions to keep dead-end findings private (L21) | significant efficiency losses (D61) |
| lack of information sharing (D82) | dead-end inefficiency (wasteful duplication) (H21) |
| lack of information sharing (D82) | early-switching inefficiency (abandoning potentially good projects prematurely) (D61) |
| absence of public discoveries (Y40) | firms abandoning potentially successful projects prematurely (D22) |