Collaborative Research: Innovation and Information

Abstract

This project studies how differences in firms' beliefs about project feasibility, success and future potential profits affect research and development (R&D) activity. These differences may arise due to firms’ prior experience with similar projects or how farther along a firm is in R&D process. Firms have an incentive to learn what their rivals know.

While learning about rivals’ progress may be easier in some industries such as pharmaceuticals due to reporting regulations, it is challenging in other industries as firms protect their R&D specific information. The project is centered around three major research questions. First, the project explores firm incentives to share private information with others and its impact on the society.

Second, the research examines whether firms should make R&D progress public or not. Third, the project looks at the reasons behind why startups focus on radical innovations and new products whereas established firms tend to pursue incremental innovations and improvements to existing products. The project has policy and regulatory implications in understanding the role of information asymmetry and information sharing on R&D activities for startups and established firms.

This research focuses on R&D races where rivals have asymmetric information about the feasibility of the project. The project explores three issues. First, if firms can commit to be truthful, then the benefits of better information to a firm seem to outweigh competitive concerns.

Although firms should have an incentive to share what they know, this decreases the probability of success and is detrimental from a social perspective. Second, firms can invest more in R&D if they do not share R&D progress publicly as information on a rival abandoning a line of research has a strong discouragement effect on others. Third, the observed regularity about incremental and radical innovations can be explained in terms of information: Smaller startup firms can usually observe the R&D activity of larger, established firms better than the other way around, which affects risk taking behavior.

This project studies these issues in a rich setting incorporating imperfect monitoring of R&D activity by firms, capital constraints and intellectual capital. The project further considers implications of incremental and radical

This award reflects NSF's statutory mission and has been deemed worthy of support through evaluation using the Foundation's intellectual merit and broader impacts review criteria.