TY - JOUR
T1 - Startups and upstarts
T2 - Disadvantageous information in r&d
AU - Awaya, Yu
AU - Krishna, Vijay
N1 - Funding Information:
The research reported here was supported by a grant from the National Science Foundation (SES-1626783). We are grateful to Nageeb Ali, Gaurab Aryal, Kaustav Das, Silvana Krasteva, Erik Madsen, John Morgan, Tsz-Ning Wong, and Shmuel Zamir for helpful discussions. We learned a lot about R&D in the pharmaceutical industry from Joshua Krieger. Finally, we have greatly benefited from the comments of a fine set of referees.
Publisher Copyright:
© 2020 by The University of Chicago. All rights reserved.
PY - 2021/2
Y1 - 2021/2
N2 - We study an R&D race between an established firm and a startup under asymmetric information. R&D investment brings success stochastically, but only if the innovation is feasible. The only asymmetry is that the established firm has better information about the feasibility of the innovation. We show that there is an equilibrium in which the poorly informed startup wins more often, and has higher expected profits, than the better-informed incumbent. When the informational asymmetry is large, this is the unique equilibrium outcome. The channel by which better information becomes a competitive disadvantage appears to be new and stems from the fact that better information dulls the incentive to learn from one’s rival.
AB - We study an R&D race between an established firm and a startup under asymmetric information. R&D investment brings success stochastically, but only if the innovation is feasible. The only asymmetry is that the established firm has better information about the feasibility of the innovation. We show that there is an equilibrium in which the poorly informed startup wins more often, and has higher expected profits, than the better-informed incumbent. When the informational asymmetry is large, this is the unique equilibrium outcome. The channel by which better information becomes a competitive disadvantage appears to be new and stems from the fact that better information dulls the incentive to learn from one’s rival.
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U2 - 10.1086/711953
DO - 10.1086/711953
M3 - Article
AN - SCOPUS:85098481054
SN - 0022-3808
VL - 129
SP - 534
EP - 569
JO - Journal of Political Economy
JF - Journal of Political Economy
IS - 2
ER -