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Starting an R&D project under uncertainty

Author

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  • Dobbelaere, Sabien
  • Luttens, Roland Iwan
  • Peters, Bettina
Abstract
We study a two-stage R&D project with an abandonment option. Two types of uncertainty influence the decision to start R&D. Demand uncertainty is modelled as a lottery between a proportional increase and decrease in demand. Technical uncertainty is modelled as a lottery between a decrease and increase in the cost to continue R&D. We relate differences in uncertainty to differences in risk premia. We deduct testable hypotheses on the basis of which we empirically analyze the impact of uncertainty on the decision to start an R&D project. Using data for about 4000 German firms in manufacturing and services (CIS IV), our model predictions are strongly confirmed.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Dobbelaere, Sabien & Luttens, Roland Iwan & Peters, Bettina, 2009. "Starting an R&D project under uncertainty," LIDAM Discussion Papers CORE 2009036, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    • Handle: RePEc:cor:louvco:2009036
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    File URL: https://sites.uclouvain.be/core/publications/coredp/coredp2009.html
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    Cited by:

    1. Sara Amoroso & Pietro Moncada-Paternò-Castello & Antonio Vezzani, 2017. "R&D profitability: the role of risk and Knightian uncertainty," Small Business Economics, Springer, vol. 48(2), pages 331-343, February.
    2. Bettina Peters & Christian Rammer, 2013. "Innovation panel surveys in Germany," Chapters, in: Fred Gault (ed.), Handbook of Innovation Indicators and Measurement, chapter 6, pages 135-177, Edward Elgar Publishing.

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    More about this item

    Keywords

    investment under uncertainty; R&D; demand uncertainty; technical uncertainty; entry threat;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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