Description:
This paper develops an innovation model where firms choose which research paths to follow. Contrary to most of the literature which focuses only on the level of investment in innovation, this model captures both the variety of research paths undertaken and the amount of duplication of research. A characterization of the equilibrium market portfolio is provided. It is shown that an increase in the number of firms weakly increases the variety of developed projects and weakly increases the amount of duplication of research. An increase in the intensity of competition among firms leads to an increase in the variety of developed projects and a decrease in the amount of duplication of research. A characterization of the socially optimal portfolio is provided. It is shown under which conditions market suboptimally invests in the variety and duplication of research projects. Market underinvestment in the variety of R&D projects is demonstrated for a large class of homogeneous goods products.