Pooling of Risky Assets and the Intensity of Cooperation in R&D
Abstract
In the case considered, risk averse …rms agree in advance to share R&D results but not R&D costs. Real R&D expenditure is unobserv-able, which creates a moral hazard problem. The …rms contract at the …rst stage on the intensity of cooperation and at the second stage on the research e¤ort. Moral hazard weakens the …rms’ motives to invest in R&D during cooperation. But diversifying the portfolio of R&D projects through cooperation increases …rms’ utility. It turns out that in the absence of monitoring, the …rms choose either high e¤ort and low intensity of cooperation or, alternatively, low e¤ort and maximal intensity of cooperation. If a …rm can monitor a partner’s real R&D e¤ort through a signal, moral hazard can weaken to an extent that risk averse and independent …rms choose high e¤ort and maximal intensity of cooperation, even if they were indi¤erent between high e¤ort and low e¤ort under isolation.
- ISSN: 1457-2923
- ISBN: 952-5071-48-0
- JEL: O31, O32, O38
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