2004 | OriginalPaper | Chapter
Closed-loop equilibrium in a multi-stage innovation race
Author : Kenneth L. Judd
Published in: Assets, Beliefs, and Equilibria in Economic Dynamics
Publisher: Springer Berlin Heidelberg
Included in: Professional Book Archive
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We examine a multistage model of an R&D race where players have multiple projects. We also develop perturbation methods for general dynamic games that can be expressed as analytic operators in a Banach space. We apply these perturbation methods to solve races with a small prize. We compute second-order asymptotically valid solutions for equilibrium and socially optimal decisions to determine qualitative properties of equilibrium. We find that innovators invest relatively too much on risky projects. Strategic reactions are ambiguous in general; in particular, a player may increase expenditures as his opponent moves ahead of him.