Racing to Ruin

2026-07-29

AI Summary

This study addresses the dynamics of R&D races among firms under endogenous catastrophic risk arising from the advancement of the technological frontier. By constructing a dynamic game-theoretic model that incorporates systemic collapse risk, the paper pioneers the endogenization of catastrophic risk within a multi-agent R&D contest framework. Integrating optimal stopping theory, Bayesian belief updating, and equilibrium analysis, it characterizes strategic boundaries under perfect monitoring and common knowledge of rationality. The analysis reveals that the equilibrium technological frontier is bounded below by the monopolist’s optimal stopping time and above by the stopping time induced by a representative firm’s misperception of rivals’ exit behavior. Importantly, enhancing monitoring transparency or strengthening beliefs in opponents’ rationality effectively mitigates excessive competition and reduces the likelihood of catastrophic outcomes.

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).

Problem

• R&D competition
• technology frontier
• disaster risk
• strategic interaction
• rationality

Innovation

• R&D competition
• disaster risk
• optimal stopping
• transparency
• trust