The free-rider problem and the optimal duration of research joint ventures: theory and evidence from the Eureka program

A research joint venture (RJV) faces a serious free-rider problem because its participants¡¯ contributions are mostly unobservable. We first present a model that shows that a RJV solves this problem by pre-committing to its termination date. Our analysis shows that there is an optimal termination date or duration, which increases with the value of the innovation per member and decreases with the R&D flow cost per member. Utilizing data from the European Eureka program, we then examine the factors determining the durations of Eureka RJVs. The empirical results support our hypotheses from the theoretical model.