Optimal technology policy under asymmetric information in a research joint venture

We analyze the optimal technology policy to solve a free-riding problem between the members of an RJV, assuming that Government intervention is subject to an additional adverse selection problem caused by its inability to distinguish the value of the potential innovation. Although subsidies and monitoring may be equivalent policy tools to solve firms’ free-riding problem, they imply different social losses if the Government is not able to distinguish perfectly the value of the potential innovation. The advantage of monitoring tools relative to subsidies is proved to depend on which type of information the Government can obtain about firms’ R&D performance.