# 14-112/II (2014-08-22; 2017-06-22)

Author(s)
Grega Smrkolj, Newcastle University, United Kingdom; Florian Wagener, University of Amsterdam and Tinbergen Institute, the Netherlands
Keywords:
Process innovation, R&D, Spillovers, Differential game, Feedback Nash equilibrium
JEL codes:
C63, C73, D43, D92, L13, O31

We study a stochastic dynamic game of process innovation in which firms can initiate and terminate R&D efforts and production at different times. We discern the impact of knowledge spillovers on the investments in existing markets, as well as on the likely structure of newly forming markets, for all possible asymmetries between firms. While an increase in spillovers may improve the likelihood of a competitive market, it may at the same time reduce the level to which a technology is developed. We show that the relation between spillovers, R&D efforts, and surpluses depends on relative as well as absolute efficiency of firms. High spillovers are not necessarily pro-competitive as they can make it harder for the laggard to catch up with the technology leader.