Real R&D Options
This is a practical guide to how organizations can use Real Option techniques to effectively value research and development by companies.
TABLE OF CONTENTS Real R&D Options
Chapter 10: Investments in Technological Innovations Under Incomplete Information
MONDHER BELLALAH
SUMMARY
An important question in financial economics is how frictions affect equilibrium in capital and real markets since in a world of costly information, some investors will have incomplete information. The specific features of financial and real markets often require an investment in information. Hence, the investment in technological innovations may require gathering information before deciding on the appropriate technology. Technological innovations may be stochastic in their arrival times and their profitability. In this context, recognizing the mechanism of learning by doing and the role of information gathering may explain actual firm policies when adopting new technologies. This chapter extends some results in Grenadier and Weiss (1997) by accounting for information costs. Information costs can be defined in the context of Merton's (1987) model of capital market equilibrium with incomplete information. We incorporate the most important characteristics of realworld technology markets as well as information costs to derive firm policies. Our formulas are simulated in different contexts for several technological parameters.
10.1 INTRODUCTION
Several models in financial economics have been proposed to deal with the ability to delay an investment expenditure. In general, the behavior of firms toward the adoption of innovations is variable. Some firms adopt new technologies when they are first available. Other firms delay the adoption until the technology is proved. Several authors analyze the factors that drive the differences in behavior. For a survey of this literature, the reader can refer to Pindyck (1991), Grenadier and Weiss (1997) and references cited therein. The innovation...
Copyright Elsevier Science Ltd. 2003 under license agreement with Books24x7
