Startups and Upstarts: Disadvantageous Information in R&D

Yu Awaya and Vijay Krishna

Journal of Political Economy, 2021, vol. 129, issue 2, 534 - 569

Abstract: We study an R&D race between an established firm and a startup under asymmetric information. R&D investment brings success stochastically, but only if the innovation is feasible. The only asymmetry is that the established firm has better information about the feasibility of the innovation. We show that there is an equilibrium in which the poorly informed startup wins more often, and has higher expected profits, than the better-informed incumbent. When the informational asymmetry is large, this is the unique equilibrium outcome. The channel by which better information becomes a competitive disadvantage appears to be new and stems from the fact that better information dulls the incentive to learn from one’s rival.

Date: 2021
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