Department of Economics
University of Melbourne
VIC 3010 Australia
Information about this author at RePEc
NBER Working Papers and Publications
|May 2009||Scarcity of Ideas and R&D Options: Use it, Lose it or Bank it|
with Suzanne Scotchmer: w14940
We investigate rewards to R&D in a model where substitute ideas for innovation arrive to random recipients at random times. By foregoing investment in a current idea, society as a whole preserves an option to invest in a better idea for the same market niche, but with delay. Because successive ideas may occur to different people, there is a conflict between private and social optimality. We characterize the welfare-maximizing reward structure when the social planner learns over time about the arrival rate of ideas, and when private recipients of ideas can bank their ideas for future use. We argue that private incentives to create socially valuable options can be achieved by giving higher rewards where "ideas are scarce."