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Download the Paper (232 K, PDF file) - December 17, 2007 Tell a colleague about it. Printing Tips: Select 'print as image' in the Acrobat print dialog if you have trouble printing.

ABSTRACT:
We consider a model of the innovative environment where there is a distinction between ideas for R\&D investments and the investments themselves. We investigate the optimal reward policy and how it depends on whether ideas are scarce or obvious. 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 argue that private incentives to create socially valuable options can be achieved by giving higher rewards where "ideas are scarce." We then explore how rewards should be structured when the value of an innovation comes from its applications, and ideas for the innovation may be more or less scarce than ideas for the applications.

SUGGESTED CITATION:
Nisvan Erkal and Suzanne Scotchmer, "Scarcity of Ideas and Options to Invest in R&D" (December 17, 2007). Economics Department, University of California, Berkeley, Working Paper E07-348.
http://repositories.cdlib.org/iber/econ/E07-348