Cobb-Douglas R&D production function, knowledge appropriability and technological opportunity conditions: Effects on R&D expenditures, technological progress and knowledge sharing

We consider a Cobb-Douglas production function with two firm-specific R&D resource inputs, spillovers in R&D expenditures and cost-reducing R&D opportunities and specify the conditions under which higher knowledge spillovers cause higher technological progress in the industry. We then consider the exponential R&D production function and establish the sufficient conditions for per-firm own R&D expenditures to be an increasing function of the extents of knowledge spillovers and technological opportunities. We consider two identical firms that, prior to competition in the product market, first decide whether to reveal their R&D efforts to the other firm and second conduct cost-reducing R&D and examine the conditions under which full revelation of R&D efforts to rivals yields higher profits than (and therefore is preferred to) withholding technological information when firms adopt a type of “trigger strategy” for the entire game. This model has new policy implications about the effects of knowledge spillovers and complementarity in R&D on the incentives to innovate and welfare.