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This paper analyses the effect of piracy on innovation in the presence of R&D competition with technological and market uncertainty. With a single innovating firm facing technological uncertainty, piracy unambiguously retards innovation. However, with R&D competition where firms face market and technological uncertainties, the authors show that piracy may enhance overall innovation. They also show that if the difference between the probabilities of success of the innovating firms is relatively large then piracy enhances the R&D investment and profit of the less efficient firm.
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