Non-Cooperative Exercise Boundaries and Regulation under Uncertainty: The Case of Cost-Reducing R&D

This paper extends the concept of the exercise boundary as an analytical tool in determining when an optimizing agent might undertake an irreversible action under uncertainty. to situations where the objective function of optimizing agents depends on decisions taken by other agents. By using the case of cost redusing R&D in a fixed numbers oligopoly under demand and technological uncertainty, the exercise bounadaries and the corresponding optimal R&D accumulation paths are determined fot the non-cooperative, cooperative, and socially optimal cases. Comparison of the exercise boundaries makes possible the formulation of R&D policy in the form of subsidies.