Abstract
AbstractWithin a principal‐agent model, the paper studies how hidden information affects incentives to invest in demand‐enhancing R&D of a firm competing in the product market. The analysis shows that, when the R&D outcome is private information of the innovating firm not only compared to its competitor, but also relative to its supplier, a contractual cost arises which neutralizes the standard strategic benefit of R&D and reduces the incentives to invest. Moreover, within this setting, more intense competition always stifles innovation.
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