Endogenous formation of research coalitions with spillovers

We examine the endogenous formation of research coalitions with high spillo vers among symmetric firms. Members of a research coalition set their R and D investments in order to maximize the aggregate profits of members of the ir coalition. The Exclusive Membership rule supports a more "concentrated" coalition structure and thus leads to higher industry R and D investments f or high spillovers than the Open Membership rule does. However, due to free -riding problems, the grand research coalition, which is the socially effic ient outcome, is rarely an equilibrium outcome under either rule. Our resul ts suggest that government subsidies to research consortia for basic resear ch with high spillovers can improve social welfare by encouraging wider par ticipation to a research consortium, that is, by alleviating free-rider pro blems in coalition formation. From a more theoretical viewpoint, our result s on stable coalition structures are applicable to a wide variety of econom ic coalitions with positive externalities. (C) 2000 Elsevier Science B.V. A ll rights reserved.