The next RITM Economics Seminar will be held on February 7th, from 12h15 to 13h15, in room A5 (Sceaux).
Chantal Marlats (Université Paris 2 Panthéon Assas) will present her paper “Racing with a rearmirror: innovation lag and investment dynamics”, co-authored with N. Klein and Lucie Ménager.
Abstract: We analyze a dynamic model in which investment decisions in a technology of uncertain quality must be made continuously over time. The outcome of the investments (success/failure) are realized after a fixed lag. We begin by examining the case of a single funding agency that decides, at each point in time, how much to invest in the technology. We show that, unlike the case without lag, where the optimal investment follows a threshold behavior, introducing lag leads to investment dynamics characterized by a wave-like pattern. Second, we analyze the case where a continuum of short-lived players make their investment decisions sequentially and compete to be the first to achieve a success. We show that when the lag is large enough, periods of positive investment indefinitely alternate with periods of no investment, resulting in an infinite series of lumpy investment waves. However, when the outcome lag is sufficiently short, but positive, equilibrium investment decreases gradually and smoothly over time along with beliefs, except at certain points where it exhibits a downward jump. The aggregate payoff, which aligns with the agency’s payoff, is strictly lower in equilibrium than in the agency’s optimal solution if and only if there is a positive outcome lag. We show that these inefficiencies are not due to over- or under-investment, but rather result from the misallocation of investments over time.
Link to the RITM Economics seminar web page