Collaborative Research and Rate of Interests

This paper makes an attempt to link collaborative research in industry with Government initiative and market rate of interests. Two firms involved in Cournot competition in the market are deciding whether to conduct research to device a technique for cost reduction. Amount of cost reduction after the research and the initial amount of capital possessed by each firm are private information to each of the firms. In particular both of them are having capacity constraint. Our objective here is to figure out the impacts of the lending and borrowing rates of interest on collaborative research. In the process we study the effectiveness of different policies to encourage collaborative R&D.