Innovation, Competition, and Investment Timing

Yrjö Koskinen () and Mæland, Jøril

No 9187, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: In our model multiple innovators compete against each other by submitting investment proposals to an investor. The investor chooses the least expensive proposal and when to invest in it. Innovators have to provide costly effort and they learn privately the cost of investing. Multiple efforts have to be compensated for, but competition helps to erode innovators' informational rents, since innovators are more likely to lose the competition if they inflate investment costs. Consequently, competition leads to faster innovation, because the investor has less of a need to delay expensive investments. The investor's payoff sensitivity also increases with competition, thus enabling the investor to capture more of the upside of innovative activity.

Keywords: Agency costs; Auctions; Innovation; Investment timing; Real options (search for similar items in EconPapers)
JEL-codes: D44 D82 G24 G31 O31 O32 (search for similar items in EconPapers)
Date: 2012-10
New Economics Papers: this item is included in nep-ino, nep-knm and nep-tid
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Journal Article: Innovation, Competition, and Investment Timing (2016)
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