‘REVERSE HYSTERESIS’: R&D INVESTMENT WITH STOCHASTIC INNOVATION

Helen Weeds

No 269349, Economic Research Papers from University of Warwick - Department of Economics

Abstract: We consider optimal investment behavior for a firm facing both technological and economic uncertainty, in the context of a research project with unpredictable outcomes. The optimal investment strategy, in the form of a pair of trigger points for investment and abandonment, is derived. As in Dixit (1989), the investment trigger exceeds the Marshallian investment point. However the abandonment trigger may exceed the Marshallian exit point, in contrast to the Dixit result, giving rise to ‘reverse hysteresis.’ Thus the firm tends to abandon research rapidly as profitability declines, at times despite the existence of positive expected profits. The model also provides a unified framework encompassing two existing models as limiting cases.

Keywords: Institutional and Behavioral Economics; Research and Development/Tech Change/Emerging Technologies (search for similar items in EconPapers)
Pages: 23
Date: 1999-05-16
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:ags:uwarer:269349

DOI: 10.22004/ag.econ.269349

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