Startups and Upstarts

We study a continuous-time R&D race between an established firm and a startup under asymmetric information. R&D investment brings success stochastically but only if the innovation is feasible. The only asymmetry between the firms is that the established firm has better information about the feasibility of the innovation. We show that there is an equilibrium in which the poorly-informed startup wins more often, and has higher expected profits, than the better-informed incumbent. When the informational asymmetry is large, this is the unique equilibrium outcome. Even though better information is a competitive disadvantage, the value of information is positive.

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