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Cash Breeds Success : The Role of Financing Constraints in Patent Races

Author

Listed:
  • Schroth, Enrique

    (Faculty of Economics and Business, University of Amsterdam)

  • Szalay, Dezsö

    (Department of Economics, University of Warwick)

Abstract
This paper studies the impact of financing constraints on the equilibrium of a patent race. We develop a model where firms finance their R&D expenditures with an investor who cannot verify their effort. We solve for the optimal financial contract of any firm along its best-response function. In equilibrium, any firm in the race is more likely to win the more cash and assets it holds prior to the race, and the less cash and assets its rivals hold prior to the race. We use NBER evidence from pharmaceutical patents awarded between 1975 and 1999 in the US, patent citations, and COMPUSTAT to measure the effect of all the racing firms' cash holdings on the equilibrium winning probabilities. The empirical findings support our theoretical predictions.

Suggested Citation

  • Schroth, Enrique & Szalay, Dezsö, 2008. "Cash Breeds Success : The Role of Financing Constraints in Patent Races," The Warwick Economics Research Paper Series (TWERPS) 873, University of Warwick, Department of Economics.
    • Handle: RePEc:wrk:warwec:873
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Patent Race ; optimal contract ; innovation ; financial constraints;
    All these keywords.

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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