Cash breeds Success: The Role of Financing Constraints in Patent Races

Enrique Schroth and Dezsoe Szalay ()

Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) from Université de Lausanne, Faculté des HEC, DEEP

Abstract: This paper studies the impact of cash constraints on equilibrium winning probabilities in a patent race between an incumbent and an entrant. We develop a model where cash-constrained firms finance their R&D expenditures with an investor who cannot verify their effort. In equilibrium, the incumbent faces better prospects of winning the race the less cash-constrained he is and the more cash-constrained the entrant is. We use NBER evidence from pharmaceutical patents awarded between 1975 and 1999 in the US, patent citations, and COMPUSTAT and fit probabilistic regressions of the predicted equilibrium winning probabilities on measures of the incumbent's and potential entrants' financial wealth. The empirical findings support our theoretical predictions.

Keywords: patent race; incumbent; entrant; financial constraints; empirical estimation (search for similar items in EconPapers)
JEL-codes: G24 G32 L13 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn, nep-com, nep-fin, nep-fmk and nep-ino
Date: 2005-05
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Related works:
Working Paper: Cash Breeds Success: The Role of Financing Constraints in Patent Races (2008)
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Persistent link: http://EconPapers.repec.org/RePEc:lau:crdeep:05.11

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