On R&D timing under uncertainty. The case of exhaustible resource substitution

On R&D timing under uncertainty. The case of exhaustible resource substitution

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Article ID: iaor1995525
Country: Netherlands
Volume: 17
Issue: 5/6
Start Page Number: 971
End Page Number: 991
Publication Date: Sep 1993
Journal: Journal of Economic Dynamics and Control
Authors: ,
Keywords: innovation
Abstract:

In this paper, the authors analyze the problem of endogeneous R&D timing when technological breakthrough and innovation are random events in a dynamic framework which involves the substitution of an exhaustible resource (oil, for instance) by an alternative technology (the backstop) that provides an everlasting source of energy. Under fairly general assumptions, they characterize the pattern of exploitation of both energy sources and study the effect of uncertain technological breakthrough on the R&D timing decision, on resource prices, and on the pattern of resource use. In comparison to the certainty case, it is shown that uncertainty consideration might delay the undertaking of R&D and might lead to a more rapid resource depletion pattern for a considerable range of R&D capital costs, while the opposite result-the conventional wisdom-holds only for some other range.

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