Rivalry and the Excessive Allocation of Resources to Research

This article presents a simple probability model of R&D which suggests that competitive firms may overinvest resources in research, even in the face of uncertainty, inappropriability and increasing costs of research. In the presence of uncertainty, some duplication of R&D efforts may be justified because of the increased probability of success that results, but competitive equilibria may be characterized by excessive duplication. Further, when different firms can discover different things, excessive knowledge may be produced, even when each firm individually performs less R&D than is socially desirable. This is a consequence of excessive entry.