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Department of Management
Tokyo University of Science
European Journal of Operational Research, ISSN: 03772217, Volume: 288, Pages: 1068-1084, Published: 1 February 2021 Elsevier BV
Abstract We study a firm’s optimal decisions on investment, default, and financing when the amount of time and the running costs for project completion are uncertain. In the presence of time-to-build, a firm makes conservative investment and financing decisions; investment is delayed, and the optimal leverage ratio is inverted U-shaped with respect to the size of the lag. Although equity holders can choose to default before the project has been completed, the default probability in the presence of time-to-build is lower than that in the absence of a lag in most cases because of the conservative investment and financing decisions. Given the lower default probability, equity holders may benefit more from debt financing in the presence of time-to-build than they would in the absence of a lag. When firms can shorten their expected time-to-build by bearing more costs, unlevered firms strive to reduce the lag more than optimally levered firms do. However, highly levered firms utilize more resources to reduce the lag than all-equity firms do because equity holders are more concerned about the possibility of default before the project’s completion.
Journal of Economic Dynamics and Control, ISSN: 01651889, Volume: 122, Published: January 2021 Elsevier BV
Abstract In this study, we investigate optimal investment timing and capacity decisions in the presence of time-to-build and competition. Due to uncertain time-to-build, a leader, who invests first, may have its product enter the market after a follower’s. We show that a dominated firm with the longer time-to-build can become a leader by making the investment earlier than a dominant firm with shorter investment lags. The leader’s capacity choice increases with the dominated firm’s time-to-build, even if the dominated entity is the leader. This finding is consistent with the observation in the electric vehicles market in which a relatively new firm with little experience of mass production makes aggressive investment early on, while the biggest carmakers capable of mass production are timing their investment. With a welfare-maximizing policy, however, the dominant firm with the shorter time-to-build always becomes the leader. There is a significant loss of social welfare with the dominated firm being the leader, and the loss increases with the asymmetry of time-to-build.
International Review of Economics and Finance, ISSN: 10590560, Pages: 332-354, Published: July 2019 Elsevier BV
We examine a technology licensing under asymmetric information and discuss the effects of R&D policies. In particular, we investigate an innovator's investment strategy and the efficiency of policies from a dynamics perspective. We show that perfect patent protection is optimal under symmetric information, whereas this is not so if the licensor has private information. Furthermore, we show that social welfare under asymmetric information is higher than that under symmetric information for most patent protection levels, yet the latter dominates the former in the presence of an optimal policy for each regime. An R&D subsidy is found suboptimal under symmetric information, whereas it can be optimal given information asymmetry. This allows us to derive a combination of patent protection and R&D subsidy that yields the first-best results under asymmetric information in multiple industries simultaneously.
European Journal of Operational Research, ISSN: 03772217, Volume: 276, Pages: 314-330, Published: 1 July 2019 Elsevier BV
Abstract We examine a license contract in a vertically separated market in the presence of a competitor’s challenge and information asymmetry. When technology’s value is not observable, innovators with more valuable technology disclose their private information to receive a fair payment despite a rival’s earlier challenge, whereas the owner of less valuable technology reveals nothing. We show that the more valuable technology is and the less bargaining power the innovator has, the more information the innovator discloses. This finding is consistent with empirical evidence on inventors’ disclosure strategy after the American Inventors Protection Act (AIPA). Furthermore, we show that despite the information disclosure, innovators make R&D investment earlier than they would have under symmetric information. This is in contrast with conventional wisdom that the need to disclose complementary information may retard innovation, and can be explained by the interaction between the decisions of investment timing and information disclosure. Though the leading innovator suffers losses from information asymmetry, the total value of the firms in the market may increase due to the diffusion of knowledge.
Haejun Jeon and Michi Nishihara
European Journal of Operational Research, ISSN: 03772217, Volume: 270, Pages: 682-697, Published: 16 October 2018 Elsevier BV
We examine a license contract in vertically separated markets, in which an inventor and a manufacturer bargain over royalties. The hold-up problem is found to be bilateral in that not only the licensor but also the licensee can delay the introduction of new technology. Given the probabilistic validity of patents and penalty upon infringement as patent instruments, we derive the optimal policies as a mix of them; not only can they always maximize the total amount of wealth but also they allocate the wealth according to each firm’s contribution to the introduction of new technology. From the perspective of patent reform, our model supports the entire market value rule on the ground that it can always yield the first-best result. We also show that there is scope for self-correction in the market; even without the government’s intervention, firms can adjust their bargaining power to improve social welfare to a certain extent. © 2018 Elsevier B.V. All rights reserved.
Journal of Economics/ Zeitschrift fur Nationalokonomie, ISSN: 09318658, Volume: 119, Pages: 179-218, Published: 1 November 2016 Springer Science and Business Media LLC
We investigate the firms’ investment decisions in the presence of litigation over infringement and cross licensing as a way to settle. The model endogenously determines not only the timing of investments but also their capacities, the degree of overlap between the initial and the subsequent innovations, and the way the competitors resolve the dispute. It shows that the firms’ R&D competition in the burgeoning market is more likely to entail a lawsuit and distinctly differentiated products, while they easily agree on cross licensing to utilize each other’s works in the slow-growing market, leaving little difference between the products. From the perspective of public policy, it is clarified that the policy on patent scope cannot yield the first-best result in terms of the speed of innovation, and the welfare analysis shows that social welfare is higher when the conflict is settled via cross licensing. However, the weak protection on patent rights, which is shown to encourage cross licensing, does not always guarantee the highest level of social welfare since it weakens the leader’s bargaining power in the negotiation, leading to fewer advanced products with higher prices.
Haejun Jeon and Michi Nishihara
Financial Review, ISSN: 07328516, eISSN: 15406288, Pages: 263-293, Published: 1 May 2016 Wiley
We propose a structural model with an optimal switching of diffusion regimes that integrates a wide range of investment reversibility. The default boundary and switching thresholds are endogenously determined, and they enable us to comprehend the interrelated problems of the investment decision, capital structure, and credit risks. We examine not only the under/overinvestment but also the under/overdisinvestment. The leverage ratio decreases when the firm has an option to invest in a reversible project, which can alleviate the capital structure puzzle. Furthermore, the model significantly reduces the wide dispersion of yield spreads depending on the credit grade of bonds.
Haejun Jeon and Michi Nishihara
International Review of Economics and Finance, ISSN: 10590560, Pages: 326-351, Published: July 01, 2015 Elsevier BV
We propose a model that jointly determines the capital structure and investment decisions taking business cycle and debt maturity into account. It endogenously determines the triggers of investment/disinvestment and default, which depend on the state of the economy. The investment triggers can be unimodal or bimodal with respect to debt maturity depending on the volatility of the growth opportunities. The optimal leverage ratio tends to increase as recession shortens, which induces higher yield spreads for short-term debt; but long-term debt is more affected by increase of expected cash flow, and thus the yield spreads decrease.
Economic Modelling, ISSN: 02649993, Pages: 99-111, Published: 2015 Elsevier BV
We propose a model that integrates a series of events regarding patent rights based on real option framework. After the incumbent has acquired a patent, it can be infringed by the challenger, and the conflict between them can be resolved via litigation or settlement with endogenously determined triggers and royalties. The model explains why litigation is so unusual in the real world and why most of the lawsuits over patent rights cease before the court's judgment is made. It also clarifies why roughly a half of litigated patents are found to be invalid in court and in what circumstances the introduction of new technology or the infringement of patent is delayed. From the perspective of implications on patent system, the model shows that neither tightening the patent examination nor widening the patent scope guarantees the acceleration of R&D investment, and rather delays it in some cases.
Haejun Jeon and Michi Nishihara
Finance Research Letters, ISSN: 15446123, Pages: 398-409, Published: 1 December 2014 Elsevier BV
We propose a model of a firm’s reversible investment decision with macroeconomic conditions based on optimal switching of a diffusion regime. The switching costs and the cash flow generated from the firm depend on a business cycle alternating via a Markov chain, and the triggers of investment and disinvestment in each state are determined endogenously. Provided the investment costs are cyclical due to high wages and rents in a boom, the investment tends to be delayed in boom, while the disinvestment is likely to be made earlier in terms of the level of switching triggers. This result shows us that the ‘hysteresis’ of investment is a rigorous phenomenon that does not change dramatically depending on business cycle. Yet, the business cycle may still amplify and propagate the exogenous shocks from macroeconomic conditions as far as the persistence of business cycle is concerned. In particular, the investment is deferred and the disinvestment occurs earlier when recession lasts longer and boom ends soon.