Spillovers, Product Innovation and R&D Cooperation: a Theoretical Model

The paper analyzes the impact of post-innovation knowledge spillovers on private firms’ R&D investment decisions, considering the case of stochastic product innovation. We propose a theoretical model where we compare two scenarios: not cooperation in R&D versus Research Joint Ventures (RJV); our analysis extends the results of the literature to the context of product innovation, confirming the general result that the presence of spillovers reduces private incentive to invest and may stimulate cooperation. Moreover, in terms of social welfare, our analysis suggests that cooperation may not be optimal and, as a consequence, subsidizing any form of R&D cooperation is not efficient. We show that cooperation in R&D leads always to the efficient allocation; however there are cases where cooperating emerges spontaneously as SPNE, and cases where cooperating does not emerge without subsides. Finally, when we assume that cooperating firms collude in the production stage, the increasing of the private incentive to cooperate reduces the cases where firms need public subsides to invest: when subsidies are costly, cooperation-collusion may be a second best solution.