Analyzing Manufacturer’s R&D Equilibrium in Defense Procurement

Abstract:

We formulate the model of R&D investment scale adjustment of defense procurement by applying game theory and contest theory and study the equilibrium of manufacturers’ R&D investment decision-making in defense procurement. We explore mainly the influence of valuation of monopolistic contract and differences among manufacturers’ abilities on investment. The conclusion shows that manufacturers’ investment equilibrium of R&D projects is what the government expects under certain conditions, however, manufacturers’ abilities effect on the investment equilibrium and makes it deviate from the government expectation. Therefore, the government must keep practically manufacturers’ anticipation about the monopolistic contact being consistent with government’s and set basic admission criterion to enable manufactures’ ability well-matched to induce the manufacturers’ investment decisions to the investment equilibrium that it desired.

• Periodical: Key Engineering Materials (Volumes 474-476)
• Pages: 1435-1439
• DOI: https://doi.org/10.4028/www.scientific.net/KEM.474-476.1435
• Online since: April 2011
• Authors: Sheng Li Chen, Xiao Dong Liu
• Keywords: Contest Theory, Defense Procurement, Development, Equilibrium, Research

References

[1] Hartly, K., Sandler,T. Economics of Defense Manual. Beijing： Economic Science Press（2001）.

[2] Peck, M.J., Scherer, F.M. The weapons acquisition process: an economic analysis. Harvard University, Cambridge, MA(1962).

[3] Scherer, F.M. The weapons acquisition process: Economic incentives. Harvard University, Cambridge, MA(1964).

[4] Crocker, K.J. Reynolds K.J. The efficiency of incomplete contracts: An empirical analysis of Air force engine procurement. Rand Journal of Economics, Vol. 24(1993), P. 126~146.

DOI: 10.2307/2555956

[5] Rogerson, W.P. Incentive the budgetary process and inefficiently low production rates in defense procurement. Defense Economics, Vol. 3(1991), P. 1~18.

DOI: 10.1080/10430719108404711

[6] Rogerson W.P. Economic incentives and the defense procurement process. Journal of Economic Perspectives, Vol. 8(1994), p.65~90.

DOI: 10.1257/jep.8.4.65

[7] Tang, G. Entry and R&D costs in procurement contracting. Journal of Economic Theory, Vol. 58(1992), p.41~60.

[8] Dasgupta A., Nti K. O. Designing an optimal contest. European Journal of Political Economy, Vol. 14(1998), p.587~603.

DOI: 10.1016/s0176-2680(98)00027-5