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Cash Breeds Success: The Role of Financing Constraints in Patent Races

Enrique Schroth () and Dezsoe Szalay ()

The Warwick Economics Research Paper Series (TWERPS) from University of Warwick, Department of Economics

Abstract: This paper studies the impact of financing constraints on the equilibrium of a patent race. We develop a model where firms finance their R&D expenditures with an investor who cannot verify their effort. We solve for the optimal financial contract of any firm along its best-response function. In equilibrium, any firm in the race is more likely to win the more cash and assets it holds prior to the race, and the less cash and assets its rivals hold prior to the race. We use NBER evidence from pharmaceutical patents awarded between 1975 and 1999 in the US, patent citations, and COMPUSTAT to measure the effect of all the racing firms' cash holdings on the equilibrium winning probabilities. The empirical findings support our theoretical predictions.

Keywords: Patent Race; optimal contract; innovation; financial constraints (search for similar items in EconPapers)
JEL-codes: G24 G32 L13 (search for similar items in EconPapers)
Pages: 54 pages
Date: 2008
New Economics Papers: this item is included in nep-cfn, nep-com, nep-ino, nep-ipr, nep-pr~ and nep-mic
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https://warwick.ac.uk/fac/soc/economics/research/w ... s/2008/twerp_873.pdf

Related works:
Journal Article: Cash Breeds Success: The Role of Financing Constraints in Patent Races (2010) Downloads
Working Paper: Cash Breeds Success: The Role of Financing Constraints in Patent Races (2008) Downloads
Working Paper: Cash breeds Success: The Role of Financing Constraints in Patent Races (2005) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:wrk:warwec:873

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