Starting an R&D Project under Uncertainty

Sabien Dobbelaere (), Roland Iwan Luttens and Bettina Peters ()
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Roland Iwan Luttens: SHERPPA, Ghent University, and CORE, Université Catholique de Louvain

No 09-044/3, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: We study a two-stage R&D project with an abandonment option. Two types of uncertainty influence the decision to start R&D. Demand uncertainty is modelled as a lottery between a proportional increase and decrease in demand. Technical uncertainty is modelled as a lottery between a decrease and increase in the cost to continue R&D. We relate differences in uncertainty to differences in risk premia. We deduct testable hypotheses on the basis of which we empirically analyze the impact of uncertainty on the decision to start an R&D project. Using data for about 4000 German firms in manufacturing and services (CIS IV), our model predictions are strongly confirmed.

Keywords: Investment under uncertainty; R&D; demand uncertainty; technical uncertainty; entry threat (search for similar items in EconPapers)
JEL-codes: D21 D81 L12 O31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ent, nep-ind, nep-ino, nep-mic, nep-ppm and nep-upt
Date: 2009-05-15
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http://www.tinbergen.nl/discussionpapers/09044.pdf (application/pdf)

Related works:
Working Paper: Starting an R&D project under uncertainty (2009)
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Persistent link: http://EconPapers.repec.org/RePEc:dgr:uvatin:20090044

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