Todd R. Kaplan, Israel Luski and David Wettstein

"Innovative activity and sunk cost"
JEL codes: D44, O31, O32
Keywords: innovation, R&D races, all-pay auctions, sunk costs

Abstract: We analyze innovative activity in a general framework with time-dependent rewards and sunk costs, When firms are identical, innovation is delayed by an increase in the number of firms or a decrease in the size of the reward. When one firm has higher profit potential, it is more likely to innovate first. Our framework generalizes an all-pay auction; however, we show that under certain conditions there is qualitatively different equilibrium behavior.

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