Publication Date: October 2004
We study a winner-take-all R&D race where ﬁrms are privately informed about the uncertain arrival rate of the invention. Due to the interdependent-value nature of the problem, the equilibrium displays a strong herding eﬀect that distinguishes our framework from war-of-attrition models. Nonetheless, equilibrium expenditure in R&D is sub-optimal when the planner is suﬀiciently impatient. Pessimistic ﬁrms prematurely exit the race, so that the expected discounted amount of R&D activity is ineﬀiciently low. This result stands in contrast to the overinvestment in research that is typical of winner-take-all R&D races without private information. We conclude that secrecy in R&D ineﬀiciently slows down the pace of innovation.
R&D, experimentation, innovation, private information, herding
JEL Classification Codes: D24, D43, D44, D82, D83
See CFP: 1296