Endogenous formation of research coalitions with spillovers

Abstract

We examine the endogenous formation of research coalitions with high spillovers among symmetric firms. Members of a research coalition set their R and D investments in order to maximize the aggregate profits of members of their coalition. The Exclusive Membership rule supports a more “concentrated” coalition structure and thus leads to higher industry R and D investments for high spillovers than the Open Membership rule does. However, due to free-riding problems, the grand research coalition, which is the socially efficient outcome, is rarely an equilibrium outcome under either rule. Our results suggest that government subsidies to research consortia for basic research with high spillovers can improve social welfare by encouraging wider participation to a research consortium, that is, by alleviating free-rider problems in coalition formation. From a more theoretical viewpoint, our results on stable coalition structures are applicable to a wide variety of economic coalitions with positive externalities.