This paper studies the impact of cash constraints on equilibrium winning probabilities in a patent race between an incumbent and an entrant. We develop a model\ud where cash-constrained firms finance their R&D expenditures with an investor who cannot verify their effort. In equilibrium, the incumbent faces better prospects of\ud winning the race the less cash-constrained he is and the more cash-constrained the\ud entrant is. We use NBER evidence from pharmaceutical patents awarded between\ud 1975 and 1999 in the US, patent citations, and COMPUSTAT to measure the\ud effect of the incumbent's and entrants' cash holdings on the equilibrium winning\ud probabilities. The empirical findings support our theoretical predictions
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