We take a differential game approach to study the optimal choices of managerial firms concerning efforts in product a process innovation. We find the Nash equilibria under the open-loop and closed-loop information structure, and we compare the steady state allocations with the corresponding equilibria of markets populated by standard profit-maximising firms. We find that the managerial incentive leads firm to underinvest in product differentiation and to overinvest in process innovation, as compared to standard profit-maximising firms.
Cellini, R. and Lambertini, L. (2008), "Chapter 9 Product and Process Innovation in Differential Games with Managerial Firms", Cellini, R. and Lambertini, L. (Ed.) The Economics of Innovation (Contributions to Economic Analysis, Vol. 286), Emerald Group Publishing Limited, Bingley, pp. 159-176. https://doi.org/10.1016/S0573-8555(08)00209-5
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