Research and Development with Asymmetric Firm Sizes

This article presents a theoretical model of research and development (R&D) competition among firms. The goal of the model is to simultaneously explain two empirical observations pertaining to the persistence of dominant firms: small firms make a disproportionate share of major innovations, while large firms tend to spend more (in absolute terms) on R&D than small firms do. In the model here, firms choose investment levels and R&D project riskiness. In equilibrium, a large firm invests more than a smaller firm but, by choosing safer R&D projects, makes fewer major innovations.