'Reverse hysteresis': R&D investment with stochastic innovation
Weeds, Helen (1999) 'Reverse hysteresis': R&D investment with stochastic innovation. Working Paper. Coventry: University of Warwick, Department of Economics. (Warwick economic research papers).
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We consider optimal investment behavior for a firm facing both technological and economic uncertainty, in the context of a research project with unpredictable outcomes. The optimal investment strategy, in the form of a pair of trigger points for investment and abandonment, is derived. As in Dixit (1989), the investment trigger exceeds the Marshallian investment point. However the abandonment trigger may exceed the Marshallian exit point, in contrast to the Dixit result, giving rise to ‘reverse hysteresis.’ Thus the firm tends to abandon research rapidly as profitability declines, at times despite the existence of positive expected profits. The model also provides a unified framework encompassing two existing models as limiting cases.
|Item Type:||Working or Discussion Paper (Working Paper)|
|Alternative Title:||'Reverse hysteresis': research and development investment with stochastic innovation|
|Subjects:||H Social Sciences > HB Economic Theory|
|Library of Congress Subject Headings (LCSH):||Hysteresis (Economics), Research and development projects, Investment analysis, Uncertainty, Technological innovations -- Economic aspects|
|Series Name:||Warwick economic research papers|
|Publisher:||University of Warwick, Department of Economics|
|Place of Publication:||Coventry|
|Date:||16 May 1999|
|Number of Pages:||23|
|Status:||Not Peer Reviewed|
|Access rights to Published version:||Open Access|
|Funder:||Economic and Social Research Council (Great Britain) (ESRC), Merton College|
|Grant number:||R00429524353 (ESRC)|
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