Limited Farsightedness in R&D Network Formation

We adopt the horizon-K farsighted set of Herings, Mauleon and Vannetelbosch (2019) to study the R &D networks that will emerge in the long run when firms are neither myopic nor fully farsighted but have some limited degree of farsightedness. We find that a singleton set consisting of a pairwise stable network is a horizon-K farsighted set for any degree of farsightedness K≥2. That is, each R &D network consisting of two components of nearly equal size satisfies both horizon-K deterrence of external deviations and horizon-K external stability for K≥2. On the contrary, each R &D network consisting of two components with the largest one comprising three-quarters of firms, predicted when all firms are fully farsighted, violates horizon-K deterrence of external deviations. Thus, when firms are homogeneous in their degree of farsightedness, pairwise stable R &D networks consisting of two components of nearly equal size are robust to limited farsightedness.