Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2009-05-15
Number: 09-044/3
Author-Name: Sabien Dobbelaere
Author-Workplace-Name: VU University Amsterdam
Author-Name: Roland Iwan Luttens
Author-Workplace-Name: SHERPPA, Ghent University, and CORE, Université Catholique de Louvain
Author-Name: Bettina Peters
Author-Workplace-Name: Centre for European Economic Research (ZEW)
Title: Starting an R&D Project under Uncertainty
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.
Classification-JEL: D21, D81, L12, O31
Keywords: Investment under uncertainty, R&D, demand uncertainty, technical uncertainty, entry threat
File-Url: https://papers.tinbergen.nl/09044.pdf
File-Format: application/pdf
File-Size: 832288 bytes
Handle: RePEc:tin:wpaper:20090044