Breaking Up a Research Consortium

Inter-firm R&D collaborations through contractual arrangements have become increasingly popular, but in many cases they are broken up without any joint discovery. We provide a rationale for the breakup date in R&D collaboration agreements. More specifically, we consider a research consortium initiated by a firm A with a firm B. B has private information about whether it is committed to the project or a free-rider. We show that under fairly general conditions, a breakup date in the contract is a (secondbest) optimal screening device for firm A to screen out free-riders. With the additional constraint of renegotiation proofness, A can only partially screen out free-riders: entry by some free-riders makes sure that A does not have an incentive to renegotiate the contract ex post. We also propose empirical strategies for identifying the three likely causes of a breakup date: adverse selection, moral hazard, and project non-viability

Irreversible investment in stochastically cyclical markets

This paper presents a new framework for studying irreversible (dis)investment when a market follows a random number of random-length cycles (such as a high-tech product market). It is assumed that a firm facing such market evolution is always unsure about whether the current cycle is the last one, although it can update its beliefs about the probability of facing a permanent decline by observing that no further growth phase arrives. We show that the existence of regime shifts in fluctuating markets suffices for an option value of waiting to (dis)invest to arise, and we provide a marginal interpretation of the optimal (dis)investment policies, absent in the real options literature. The paper also shows that, despite the stochastic process of the underlying variable has a continuous sample path, the discreteness in the regime changes implies that the sample path of the firm’s value experiences jumps whenever the regime switches all of a sudden, irrespective of whether the firm is active or not.Real Options, Regime-Switching, Bad News Principle, Signal Extraction Problem, Entry and Exit, Industry Life Cycles

Crustal Structure Of The Kapuskasing Uplift From Lithoprobe Near-vertical/wide-angle Seismic Reflection Data

As one of the first targets of the LITHOPROBE project, the Kapuskasing uplift (KU), located in the central Canadian shield, has been subjected to extensive geological and geophysical studies for the last decade.;To better delineate the crustal structure across the KU, we have reprocessed some seismic reflection data. By carefully applying standard seismic processing techniques such as first arrival muting, F-K filtering, refraction and residual static corrections, we have enhanced seismic images significantly. Our tests indicate that the full data set should be used without stacking two adjacent shot gathers into one in order to preserve dipping reflections and to keep high fold coverage.;For the first time, the shallow structure of the Ivanhoe Lake fault zone (ILFZ) is clearly imaged on a seismic section as a series of prominent northwest-dipping reflections with listric geometry. It appears that the ILFZ is a steep fault ({dollar}\sim{dollar}50{dollar}\sp\circ{dollar}) at the surface but quickly flattens out to {dollar}\sim{dollar}20{dollar}\sp\circ{dollar} at shallow depths. 2-D tomographic inversion of multiple coverage first arrivals, picked from the seismic reflection data, was also performed to reconstruct P-wave velocity structure of the ILFZ near the surface. The most striking aspect of the inversion is that it reveals a northwest-dipping high-velocity zone, in excellent agreement with the seismic reflection images. It shows that the west-dipping reflectors mark the boundary juxtaposing high-velocity against low-velocity rocks, providing additional and firm support for the interpretation of the seismic reflection images. Direct correlation with geological observations indicates that the high reflectivity associated with the fault zone most likely originates from mylonites.;The least expected yet most important finding of the reprocessing is a pronounced northwest-dipping midcrustal reflector, originating from the Abitibi belt and plunging under the KU. The existence of such a reflector is independently confirmed by wide-angle reflection data from a cross-profile. This reflector is also detected by two other reflection profiles crossing the ILFZ about 80 km to the southwest. Its concave-down shape and broad lateral extent, in conjunction with the present geological and other geophysical data, suggest that it represents underthrusting of the Abitibi greenstone rocks beneath the KU. With the overthrust (KU) and underthrust (Abitibi) defined, it becomes evident that the KU is a product of intra-plate collision. The large-scale underthrusting of the Abitibi rocks may not only be primarily responsible for the emplacement of the KU, but also act as a means to balance the overloaded Kapuskasing dense rocks in the upper crust. Neither the seismic refraction nor reflection data show conclusive evidence for a thick crustal root under the KU. (Abstract shortened by UMI.

Dynamic game under ambiguity: the sequential bargaining example, and a new "coase conjecture"

Conventional Bayesian games of incomplete information are limited in their ability to represent severe incompleteness of information. Using an illustrative example of (seller offer) sequential bargaining with one-sided incomplete information, we analyze a dynamic game under ambiguity. The novelty of our model is the stark assumption that the seller has complete ignorance---represented by the set of all plausible prior distributions---over the buyer's type. We propose a new equilibrium concept---Perfect Objectivist Equilibrium (POE)---in which multiple priors and full Bayesian updating characterize the belief system, and the uninformed player maximizes the infimum expected utility over non-weakly-dominated strategies. We provide a novel justification for refining POE through Markov perfection, and obtain a unique refined equilibrium. This results in a New "Coase Conjecture"---a competitive outcome arising from an apparent monopoly, which does not require the discount rate to approach zero, and is robust to reversion caused by reputation equilibria

Subsidizing research programs with "if" and "when" uncertainty in the face of severe informational constraints

We study government optimal subsidy policies for research programs in the face of servere information asymmetry---when firms have private information about the likelihood of project viability but the government cannot form a unique prior belief about this likelihood. The paper makes two contributions. First, we show that the way in which R&D is subsidized matters. Under both monopoly R&D (i.e., a single firm conducts R&D in isolation) and R&D competition, different types of subsidies (e.g., earmarked, unrestricted subsidies, and pure matching subsidies) have significantly different effects on firms' R&D investment incentives. Second, we show that a simple subsidy scheme works even when the government is unable to form a unique prior belief about the firm's private information on project viability. If the shadow cost of public funds is zero, under monopoly R&D, there exists a pure matching subsidy that induces the firm to follow the first-best R&D policy irrespective of its prior beliefs about the viability of the project, meaning it is a (belief-free) ex post equilibrium policy; under R&D competition, the first-best outcome can also be achieved through a simple combination of a matching subsidy and an unrestricted subsidy. If the shadow cost of public funds is positive, an ex post equilibrium in general does not exist either under monopoly or competition. We then consider two alternative policy decision criteria that are appropriate for belief-free games: rationalizability and max-min criteria. We argue that the max-min criteria is preferable in our context, and by way of doing so establish that the set of max-min subsidy policies under either monopoly or competitive R&D consists entirely of simple pure matching subsidies. We further establish that allowing firms to form an R&D consortium reduces the matching rate for the highest max-min subsidy, suggesting that cooperative R&D has the potential to economize on the shadow costs of public funding of subsidies