R&D investments under endogenous cluster formation

We study investments in R&D and the formation of R&D clusters of firms which are competitors in the market. In a three stage game, firms first decide on long-term R&D investment, then form research clusters according to the unanimity game introduced in Bloch(1995), and finally compete in quantities. For some range of investment costs, equilibria with no-investment co-exist with equilibria where a large fraction of firms invest in R&D. Because of the effects of R&D investment on cluster membership, firms tend to over-invest compared to a scenario where research clusters are ex-ante fixed and also compared to the welfare optimum.