A Strategic Investment Game with Endogenous Absorptive Capacity

    Publication: Working/Discussion PaperWU Working Paper

    Abstract

    R&D plays a dual role: First, it generates new knowledge and second, it develops a firm's absorptive capacity. Most of the existing strategic investment game models neglect, however, the second role of R&D. The aim of this paper is to incorporate the absorptive capacity hypothesis in such a model by endogenizing the spillover. A two-stage game is established and subsequently solved, looking for the subgame perfect Nash equilibria. Considering the comparative static properties of the model as well as the simulation results, a new effect appears: The "free-rider effect" of the models with exogenous spillover, which deteriorates the higher the spillover becomes, is now counteracted by the "absorptive capacity effect". It is found that firms will invest more in R&D to strengthen absorptive capacity when the spillover parameter is higher. (author's abstract)
    Original languageGerman (Austria)
    Publication statusPublished - 1 Oct 2006

    Publication series

    NameDepartment of Economics Working Paper Series
    No.92

    WU Working Paper Series

    • Department of Economics Working Paper Series

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