ON RESEARCH-AND-DEVELOPMENT TIMING UNDER UNCERTAINTY - THE CASE OF EXHAUSTIBLE RESOURCE SUBSTITUTION

In this paper, we analyze the problem of endogenous R&D timing when te chnological breakthrough and innovation are random events in a dynamic framework which involves the substitution of an exhaustible resource (oil, for instance) by an alternative technology (the backstop) that p rovides an everlasting source of energy. Under fairly general assumpti ons, we characterize the pattern of exploitation of both energy source s and study the effect of uncertain technological breakthrough on the R&D timing decision, on resource prices, and on the pattern of resourc e use. In comparison to the certainty case, it is shown that uncertain ty consideration might delay the undertaking of R&D and might lead to a more rapid resource depletion pattern for a considerable range of R& D capital costs, while the opposite result - the conventional wisdom - holds only for some other range.