Innovative Activity and Sunk Cost

Paper number: 00/06

Paper date: November 6, 2000

Year: 2000

Paper Category: Working Paper

Authors

Todd R. Kaplan, Israel Luski, David Wettstein

Abstract

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 pro t 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 di erent equilibrium behavior.

Innovative Activity and Sunk Cost Innovative Activity and Sunk Cost