Divergent expectations and R&D expenditures

Abstract

This paper is concerned with the role that expectations play in the allocation of funds for research and development in an industry. In particular, we are interested in the question as to whether differences of beliefs among firm managers in an industry as to the prospective payoffs from R&D tend to increase or decrease the amount of R&D spending within an industry. For example, when each firm manager believes that the other firms have as good a chance of producing a profitable innovation at his firm, do differences of beliefs among firm managers as to the chances of success encourage or discourage R&D expenditures in the industry as compared to commonly shared beliefs as to the chances of success? To put it another way, does consensus or diversity "pay" in the sense of increasing the level of R&D expenditures in an industry? Viewed in this way, the problem considered in this paper is related to that of assessing the effects of government long-term forecasts as to future prospects for an industry (assuming they are believed by firms in the industry) on R&D spending.