Innovative Activity and Sunk Cost
Paper number: 00/06
Paper date: November 6, 2000
Paper Category: Working Paper
Todd R. Kaplan, Israel Luski, David Wettstein
We introduce time-dependent rewards into a general framework for analyzing innovative activity among rms with sunk costs of R&D. When rms are identical, innovation is delayed by an increase in the number of rms or a decrease in the size of the reward. When one rm has higher prot potential, it is more likely to innovate rst. Our framework generalizes an all-pay auction; however, we show that under certain conditions there is qualitatively dierent equilibrium behavior.