Abstract
AbstractEntrepreneurs often face undiversifiable idiosyncratic risks from their R&D investments. We extend the real options model of R&D to an incomplete markets environment. We find the effect of market incompleteness on R&D investment is ambiguous. With low technological uncertainty, the agent under incomplete markets over‐investment in R&D. However, market incompleteness leads to under‐investment in R&D when the technological uncertainty is high.
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