Spillovers, disclosure lags, and incentives to innovate. Do oligopolies over-invest in R&D?

Gianluca Femminis and Gianmaria Martini

No itemq0744, DISCE - Quaderni dell'Istituto di Teoria Economica e Metodi Quantitativi from Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE)

Abstract: We develop a dynamic duopoly, where firms have to take into account a technological externality, that reduces over time their innovation costs, and an inter-firm spillover, that lowers only the second comer's R&D cost. This spillover exerts its effect after a disclosure lag. We identify three possible equilibria, which are classified, according to the timing of R&D investments, as early, intermediate, and late. The intermediate equilibrium is subgame perfect for a wide parameters range. When the innovation size is large, it implies that the duopolistic market equilibrium involves underinvestment. Hence, even in presence of a moderate degree of inter-firms spillover, the competitive equilibrium calls for public policies aimed at increasing the research activity. When we focus on minor innovations -- the case in which, according to the earlier literature, the market equilibrium underinvests -- our results imply that the policies aimed at stimulating R&D have to be less sizeable than suggested before, despite the presence of an inter-firm spillover.

Keywords: knowledge spillover; dynamic oligopoly (search for similar items in EconPapers)
JEL-codes: L13 L41 O33 (search for similar items in EconPapers)
Pages: nn pages 39
Date: 2007-06
New Economics Papers: this item is included in nep-com, nep-ino, nep-ipr, nep-pr~, nep-knm, nep-mic and nep-tid
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Working Paper: Spillovers, disclosure lags, and incentives to innovate. Do oligopolies over-invest in R&D? (2007)
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