A Note on R&D Innovation with Socially Responsible Firms

Abstract

This work revisits the R&D duopoly à la (d’Aspremont and Jacquemin, Am Econ Rev 78:1133–1137, 1988, d’Aspremont and Jacquemin, Am Econ Rev 80:641–642, 1990) (AJ henceforth) considering an economy with firms engaged in corporate social responsibility (CSR). In the traditional AJ setting without spill-over effects, firms invest in R&D as a sub-game perfect Nash equilibrium (SPNE) strategy, but they are cast into a prisoner’s dilemma. Socially responsible firms can get the same SPNE result. Preliminarily, we show that the level of firms’ social concern has a positive effect on the R&D investment. Unlike the basic framework, however, if the consumer welfare weights enough in each firm’s objective, investing in R&D becomes a firm’s utility-enhancing strategy also without R&D spillovers: the prisoner’s dilemma vanishes, and the R&D investment-decision game with CSR turns out to be an anti-prisoner’s dilemma, in which investing in R&D is the firm’s Pareto-efficient choice. Then, if firms are CSR-oriented, investing in R&D becomes a Pareto-superior outcome for society (with or without R&D spillovers). The article also shows that R&D subsidies can be used as a welfare-maximising tool.