Economics Insights @ CBS

This paper studies dynamic competition in markets characterized by the introduction of technologically advanced next-generation products. Firms invest in new product effort in an attempt to attain industry leadership, thus securing high profits and benefiting from advantages relevant for the success of future product generations. The analysis reveals that when the current leader possesses higher research and development (R&D) competence, it tends to invest more in R&D than rivals and to retain its lead position.

In this paper, limited managerial capacity gives rise to a timing option: agents can implement projects now-or-later. Because each agent cares only about the project he implements, while the principal cares about the projects undertaken in aggregate, the timing option may be valued differently by the principal and the agents. Under a fair assignment rule (one that treats the agents symmetrically), these conflicting valuations result in agents sometimes not implementing the principal's desired projects.

Motivated by the problem of efficient estimation of expected cumulative rewards or cashflows, this paper proposes and analyzes a variance reduction technique for estimating the expectation of the sum of sequentially simulated random variables. In some applications, simulation effort is of greater value when applied to early time steps rather than shared equally among all time steps; this occurs, for example, when discounting renders immediate rewards or cashflows more important than those in the future. This suggests that deliberately stopping some paths early may improve efficiency.

Three experiments explored the effect of outcome delays — longer time horizons for the realization of outcomes — on the efficiency of negotiated agreements. We hypothesized that there would be a positive relationship between a longer temporal distance to the consequences of negotiated agreements and the efficiency of those agreements. Outcome delays did increase the efficiency of the negotiated agreements. In addition, type of resource, burden or benefit, moderated this relationship.