COORDINATING RESEARCH THROUGH RESEARCH JOINT VENTURES

In a simple model, we show that a joint venture can implement the rate s of investment that maximize joint profit when firms' research abilit ies are private information. This can be done with budget balance, eve n though there are participation constraints. There is no conflict bet ween budget balance and participation constraints because firms' payof fs can depend on ex post signals of abilities. The conflict between bu dget balance and participation constraints is restored when both abili ties and rates of investment are unobservable. We give a condition und er which the profit-maximizing rates of investment can be implemented if we relax budget balance.