Resource Allocation Among Competing Innovators

Pin Gao (), Xiaoshuai Fan (), Yangguang Huang () and Ying-Ju Chen ()
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Pin Gao: School of Data Science, Chinese University of Hong Kong, Shenzhen, Guangdong 518116, China
Xiaoshuai Fan: Department of Information Systems and Management Engineering, College of Business, Southern University of Science and Technology, Shenzhen, Guangdong 518055, China
Yangguang Huang: Department of Economics, Hong Kong University of Science and Technology, Hong Kong
Ying-Ju Chen: School of Business and Management, Hong Kong University of Science and Technology, Hong Kong

Management Science, 2022, vol. 68, issue 8, 6059-6074

Abstract: Many innovative products are designed to satisfy the demand of specific target consumers; thus, the innovators will inevitably compete with each other in the product market. We investigate how a profit-maximizing principal should properly allocate her limited resources to support the innovations of multiple potentially competing innovators. We find that, as the available resources increase, the optimal diversification of investment may first increase and then decrease. This interesting nonmonotone pattern is driven by a trade-off between the risk of innovation failure and rent dissipation because of competition. Using this framework, we also analyze a nonprofit principal seeking to maximize the total number of successful innovations, the probability of at least one innovator succeeding, consumer surplus, and total social welfare. A nonprofit principal tends to invest more diversely compared with a for-profit counterpart.

Keywords: innovation; competition; R&D; venture capital; resource allocation (search for similar items in EconPapers)
Date: 2022
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