R&D and Markets for New Knowledge Over Firms' Life-Cycles

Abstract

This paper develops a model of R&D with firms’ life-cycles. When a young firm creates new knowledge, the firm may hesitate to implement the knowledge because it is hard to predict if the implementation will be successful. Nevertheless, once the firm implements the knowledge successfully (and thereby becomes established), the firm optimally becomes more willing to implement another knowledge of the same type. Studying a dynamic equilibrium of the economy populated by both young and established firms, we derive the implications on the market for knowledge. We find that established firms are more likely to buy knowledge than young firms because established firms can, but not young firms, selectively buy the knowledge that the firms will be able to implement successfully. We also find that as the transaction cost of selling knowledge becomes lower, young firms replace established firms as creators and sellers of knowledge and a lower fraction of young firms grows into established firms, since young firms find specializing in creating knowledge more profitable than implementing it.