CFDP 1489

Competitive Experimentation with Private Information


Publication Date: October 2004

Pages: 44


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