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We present a model where firms conduct R&D in both a safe and a risky direction. As patentability standards rise, an innovation in the risky direction is less likely to receive a patent, which decreases the static incentive for new entrants to conduct risky R&D but can increase their dynamic incentive. These, together with a strategic substitution and a market structure effect, result in an inverted-U shape in the risky direction but a U shape in the safe direction for the relationship between R&D intensity and patentability standards. R&D is biased toward (against) the risky direction under lower (higher) standards.
Bibliographical noteShiyuan Pan gratefully acknowledges financial support from the Key Project of the National Social Science Foundation of China (No. 15AJY003) and the Project of the Scientific Research Foundation for the Returned Overseas Chinese Scholars of the Ministry of Education of China. Tianle Zhang gratefully acknowledges the Hong Kong Research Grant Council for research support under Grant #23501215.
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- 1 Finished
1/01/16 → 31/12/18
Project: Grant Research