EconPapers    
Economics at your fingertips  
 

Demand lotteries, abandonment options and the decision to start R&D and process innovation

Sabien Dobbelaere (), Roland Iwan Luttens and Bettina Peters ()

management revue. Socio-economic Studies, 2015, vol. 26, issue 1, 25-51

Abstract: We study different determinants of real-life R&D decisions within a net present value framework. Besides entry threat, Bertrand competition and multi-stage R&D with an abandonment option, our model includes demand uncertainty, modelled as a lottery. A lottery becomes more divergent when the difference between the outcomes of the lottery increases. We derive under which lottery probabilities more divergent demand lotteries positively or negatively affect the decision to start R&D. Using CIS IV data for about 2600 German firms, we find that for firms facing lotteries where the good state is more likely to prevail a 10% increase in the degree of divergence of the demand lottery increases the likelihood of undertaking R&D by 1.2 percentage points. For firms facing a demand lottery where the bad state is most likely to prevail, a 10% increase in the degree of divergence of the demand lottery decreases the likelihood of undertaking R&D by 4.6 percentage points. Having the option to abandon R&D projects significantly increases the likelihood of undertaking R&D.

Keywords: multi-stage R&D; demand uncertainty; entry threat; abandonment option (search for similar items in EconPapers)
JEL-codes: D21 D81 L12 O31 (search for similar items in EconPapers)
Date: 2015
References: Add references at CitEc
Citations Track citations by RSS feed

Downloads: (external link)
http://www.hampp-verlag.de/hampp_e-journals_mrev.htm#115 (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:rai:mamere:mrev-2015-01-dobbelaere

Ordering information: This journal article can be ordered from
Rainer Hampp Verlag, Journals, Vorderer Lech 35, 86150 Augsburg, Germany. A subscripton is required to access pdf files. Pay per article is available at
http://www.hampp-verlag.de/Hampp_Recherche_e.htm

Access Statistics for this article

management revue. Socio-economic Studies is currently edited by Matthias Baum, Ina Ehnert, Marcel Erlinghagen, Simon Fietze, Susanne Gretzinger, Wenzel Matiaske and Sylvia Rohlfer

More articles in management revue. Socio-economic Studies from Rainer Hampp Verlag
Bibliographic data for series maintained by Rainer Hampp ().

 
Page updated 2018-06-04
Handle: RePEc:rai:mamere:mrev-2015-01-dobbelaere