Asymmetric information in a duopoly with spillovers: new findings on the effects of RJVs

The positive effect of R&D cooperation agreements in presence of high spillovers has been widely analyzed. Since d’Aspremont and Jacquemin (1988) and Kamien et al. (1992) several works highlighted the underinvestment in R&D due to incomplete appropriability of R&D results; cooperation in R&D activities has the role of enhancing innovation, raising the level of investment closer to its socially optimal level. I investigate the role of R&D cooperation agreements (RJVs) in a context of incomplete information with asymmetric firms. Also, with the introduction of a further stage, I analyze the incentive to engage in R&D cooperation, thus going further a simple comparison between the two regimes. Some interesting results arise from this extended model. (i) When firms compete in R&D, incomplete information about rival’s R&D productivity leads to inefficient investment choices in some regions of parameters; in particular, when firms are actually symmetric, asymmetric information further reduces the investment, with respect to the complete information setting. (ii) A signaling role of cooperation agreements emerges, in addition to the already recognized role in reducing the inefficiencies arising from free riding problem. Revealing its willingness to participate, the efficient firm to signal its type, thus increasing the investment level (innovation enhancing effect) and improving total welfare. (iii) When firms are asymmetric, for most of the parameters’ values, RJV is not formed and does not fulfill the role of stimulating innovation.