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Strategy Seminar

Wednesday January 29, 2014


2:45PM - 4:15PM



KEVIN A BRYAN, Kellogg School of Management - Northwestern University


R&D Policy and the Direction of Innovation

Is the private sector allocation of researchers across projects socially optimal? This question is particularly relevant when inventions today affect the nature of R&D opportunities in the future. I develop a theory of the direction of innovation which incorporates many forms of R&D sponsorship, including direct subsidies, patents, and tax credits. In equilibrium, firms sometimes deviate to easy inventions with a lower payoff than the planner optimal project. When this happens, unlike in classic sequential innovation models, policies that increase the payoff to R&D by a similar amount across projects can exacerbate inefficiency. In addition, this directional inefficiency generates a wedge between the conditions for path dependence in the firm equilibrium and planner optimum, leaving open a role for policy in responding to ``lock-in''. I apply these theoretical results to the United States nuclear power reactor research program, showing how mistakes in government policy reinforced private sector incentives to develop reactor types that scientists and historians have argued were suboptimal research targets

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Barbara Baxter

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