Timing of discovery and the division of profit with complementary innovations

This paper studies the optimal division of profit with complementary innovations. We identify circumstances in which the research should be conducted sequentially, targeting one innovation after another in a prespecified order, even if each innovation can be achieved independently of the others. We then consider the implementation of this sequential pattern of investment in a market equilibrium with specialized research firms. Firms are involved in a war of attrition, where each has an incentive to wait for the others to achieve their innovations before sinking its own R&D investment. We show that the optimal policy must reward early innovators more generously than late ones to speed up the innovative process.