R&D cooperation, proximity and distribution of public funding between public and private research sectors

In this paper, we compare the distributions of socially optimal public funding between private and public research sectors in cooperative and noncooperative R&D settings in the presence of externalities. We show that the proportion of public funding allocated to the private sector research always increases with the level of inter‐firm spillovers but decreases with the concentration of the industry. This share is smaller (larger) when firms cooperate in R&D than when they do not for high (low) spillovers. Moreover, increases in public knowledge externalities to the private sector due to a closer proximity (distance) between the two research sectors increase the share allocated to the public sector regardless of whether firms cooperate or not in R&D.