Racing to Ruin

Abstract

We study R&D competition in the shadow of disaster: advancing the technology frontier raises the risk of permanently ending all firms' payoffs. Under perfect monitoring and common knowledge of rationality, the equilibrium frontier is bounded below by the optimal stopping time of a monopolist, and above by that of a representative firm that persistently but mistakenly believes its rival is about to stop. We then analyze how the frontier is shaped by transparency (speed of monitoring) and trust (belief in the rationality of rival firms).