Theory of Cooperative R&D

It is generally accepted that the incentives of firms to invest in research and development (R&D) are distorted because of the public good characteristic of new information. In particular, the appropriability problem has been widely discussed in the literature (cf. Spence, 1984, Cohen and Levinthal, 1989), which causes firms to underinvest in R&D because they can not completely internalize the social returns of their private efforts in the presence of R&D spillovers. Three instruments are usually considered to restore the firms’ incentives to engage in R&D: Tax policies and direct subsidies, ex-post R&D cooperation through patents and licensing, and ex-ante R&D cooperation (cf. Katz and Ordover, 1990). While the first two instruments require government intervention to determine taxes and subsidies or to strengthen property rights, the third instrument is assumed to work through private incentives because of the possibility to internalize R&D spillovers between cooperating firms.41 Other advantages of R&D cooperation include the elimination of wasteful duplication of R&D efforts and the distribution of risk and fixed costs among participants (cf. Jacquemin, 1988).