R&D investments under endogenous cluster formation

Abstract

We provide an innovative theory-based explanation for the positive relationship between firms’ R&D intensity and their degree of R&D cooperation. We show that, when oligopolistic firms decide on long-term R&D investment before forming research clusters among competitors, investment incentives are increased by the desire to become a member of an attractive cluster. This can result in over-investment compared to the welfare optimum and compared to a scenario where research clusters are ex-ante fixed. Thereby, as a theoretical contribution, we fully characterize the equilibria of the unanimity game on cluster formation with heterogeneous firms.