Endogenous Innovation Spillovers and Technology Policy

We examine a model of R&D competition and cooperation in the presence of spillovers. Unlike virtually all the literature, however, we treat these spillovers as endogenous and under the control of firms. We show that it is then essential to make a number of distinctions that are ignored in the literature. In particular, we need to distinguish between the amount of R&D that firms do and the amount of spillover they generate; between information sharing and research coordination; between each of the latter and cooperation; between substitute and complementary research paths; between firms located in the same industry or in different industries. These distinctions matter because, as we show, coordination can arise without cooperation (different industries, complementary research, research design) while cooperation need not induce information sharing (same industry, substitute research, information sharing). In many cases, however, allowing cooperation is sufficient to induce full information sharing/research coordination, in which case the justification, if any, for a technology policy that takes the form of an R&D subsidy lies in encouraging firms to undertake more R&D. Our analysis suggests that cooperative arrangements between firms may often produce too little R&D, and therefore R&D subsidies can be justified – but not to correct information problems, but other market failures in the amount of R&D firms choose to do.