Assessing Alternative R&D Investment Projects under Uncertainty

Abstract

In this paper, we consider two kinds of technologies distinguished by their level of productivity and associated costs, such that one technology increases the quantity of output more than the alternative technology. The firm must then decide in which technology to invest and when to invest in the chosen R&D project so as to maximize profit. To solve this problem, we formulate it as an optimal stopping problem for the firm. Using this analysis, we endogenously obtain the firm’s expenditure on R&D investment and numerically locate the R&D investment thresholds for the firm’s projects.