Dynamic Games of R&D Investment


We study a dynamic investment game in which firms are differentiated by their R&D stocks and therefore productivities. When investing in R&D, firms face “success-breeds-success” probabilities, where accumulated successes improve their subsequent investment productivity. The government may seek to reallocate resources to smaller firms to reduce markups, as in Klette and Kortum (2004). We characterize the optimal policy under uncertainty.