STABLE R-AND-D COOPERATION WITH SPILLOVERS

The literature on the incentives for R&D cooperation with spillovers t ypically deals only with the factors affecting cooperative profits. Th is paper focuses on the incentives to cheat and the stability of such cooperative agreements in a repeated game framework. It is shown that the stability of cooperation is influenced by the nature and magnitude of spillovers, relative to the nature and degree of product market co mpetition. While cooperative profits are higher with large positive (e xogenous, unintended) know-how spillovers, such as in fundamental rese arch, our analysis shows that it may be easier to sustain cooperation in areas with lower spillovers, such as applied research, because of t he smaller incentives to cheat on the initial agreement, at feast when firms produce substitutes. Alternatively, the possibility of technolo gy sharing (i.e., intended or endogenous spillovers), besides R&D coor dination, not only increases cooperative profits but also reduces the incentives to defect from a cooperative equilibrium.