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Strategic R&D Investment Under Information Revelation

Author

Listed:
  • Flavia Cortelezzi
  • Giovanni Villani
Abstract
R&D projects generally involve multiple phases with or without overlapping. Moreover, the investment is usually made in a phased manner, with the commencement of the subsequent phase being dependent on the successful completion of the preceding phase. The aim of this article is to analyze the equilibrium strategies of two firms competing for a two-stage sequential R&D investment, when a firm may infer a private signal from the strategy played by the other. Thus, firms must formulate their optimal strategies in a context of imperfect information. We evaluate the resulting compound option with information revelation as an American compound exchange option using Monte Carlo simulations. We then show that different equilibria may arise.

Suggested Citation

  • Flavia Cortelezzi & Giovanni Villani, 2012. "Strategic R&D Investment Under Information Revelation," The Engineering Economist, Taylor & Francis Journals, vol. 57(1), pages 20-40.
    • Handle: RePEc:taf:uteexx:v:57:y:2012:i:1:p:20-40
    DOI: 10.1080/0013791X.2011.649511
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    References listed on IDEAS

    as
    1. Flavia Cortelezzi & Pierpaolo Giannoccolo & Giovanni Villani, 2011. "Strategic Urban Development Under Uncertainty," The IUP Journal of Financial Economics, IUP Publications, vol. 0(4), pages 7-27, December.
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    4. Flavia Cortelezzi & Giovanni Villani, 2009. "Valuation of R&D Sequential Exchange Options Using Monte Carlo Approach," Computational Economics, Springer;Society for Computational Economics, vol. 33(3), pages 209-236, April.
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    7. Flavia Cortelezzi & Giovanni Villani, 2007. "Strategic Technology Adoption and Market Dynamics as Option Games," Quaderni DSEMS 14-2007, Dipartimento di Scienze Economiche, Matematiche e Statistiche, Universita' di Foggia.
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