Racing with a Rearview Mirror: Innovation Lag and Investment Dynamics
Abstract:
We analyze a dynamic investment model in which short-lived agents sequentially decide how much to invest in a project of uncertain feasibility. The outcome of the project (success/failure) is observed after a fixed lag. We characterize the unique equilibrium and show that, in contrast with the case without lag, the unique equilibrium dynamics is not in thresholds. If the initial belief is relatively high, investment decreases monotonically as agents become more pessimistic about the feasibility of the innovation. Otherwise, investment is not monotone in the public belief: players alternate periods of no investment and periods of positive, decreasing investment. The reason is that the outcome lag creates competition between a player and her immediate predecessors. A player whose predecessors did not invest may find investment attractive even if she is more pessimistic about the technology than her predecessors. We compare the total investment obtained in this equilibrium with that obtained with an alternative reward scheme where a mediator collects all the information about the players’ experiences until some deadline, and splits the payoff between all the players who obtained a success before the deadline.
Language: English
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Joint work with Chantal Marlats et Lucie Ménager