Starting an R&D project under uncertainty

Sabien Dobbelaere, R. I. Luttens () and Bettina Peters ()

Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium from Ghent University, Faculty of Economics and Business Administration

Abstract: We study a two-stage R&D project with an abandonment option. Two types of uncertainty influence the decision to start R&D. Demand uncertainty is modelled as a lottery between a proportional increase and decrease in demand. Technical uncertainty is modelled as a lottery between a decrease and increase in the cost to continue R&D. We relate differences in uncertainty to differences in risk premia. We deduct testable hypotheses on the basis of which we empirically analyze the impact of uncertainty on the decision to start an R&D project. Using data for about 4000 German firms in manufacturing and services (CIS IV), our model predictions are strongly confirmed.

Keywords: Investment under uncertainty; R&D; demand uncertainty; technical uncertainty; entry threat (search for similar items in EconPapers)
JEL-codes: D21 D81 L12 O31 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2009-05
New Economics Papers: this item is included in nep-ino, nep-ppm and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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http://wps-feb.ugent.be/Papers/wp_09_585.pdf (application/pdf)

Related works:
Working Paper: Starting an R&D project under uncertainty (2009)
Working Paper: Starting an R&D Project under Uncertainty (2009)
Working Paper: Starting an R&D Project under Uncertainty (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:rug:rugwps:09/585

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