THE ALLOCATION OF RESOURCES TO COOPERATIVE AND NONCOOPERATIVE R&D *

The precompetitive R&D literature has viewed cooperative and noncooperative R&D as substitutes. In this paper a more realistic approach is taken, where both cooperative and noncooperative R&D are performed in parallel. In the first stage, firms determine the optimal investments in both types of R&D and in the second stage they compete in output. It is found that information sharing between cooperating firms contributes not only to cooperative R&D, but also to noncooperative R&D. The two types of R&D reinforce each other. The level of cooperative R&D may be higher or lower than noncooperative R&D. In a Cournot duopoly, the share of cooperative R&D lies between 20% and 80% of total R&D and this share increases with spillovers and information sharing. It is always optimal to subsidize half the costs of cooperative R&D, while the subsidy to noncooperative R&D is unchanged from the standard model. Consumers prefer intermediate levels of spillovers and information sharing, while firms prefer higher levels of spillovers, which entail lower levels of information sharing. Copyright Blackwell Publishing Ltd/University of Adelaide and Flinders University of South Australia 2004.