Cooperative R&D under uncertainty with free entry

This paper analyzes the effects of cooperative R&D arrangements in a model with stochastic R&D and output spillovers. Our main innovation is to allow for free entry in both the R&D race and product market. Moreover, in contrast with the literature, we assume that cooperative R&D arrangements do not have to include all the firms in the industry. We show that sharing of research outcomes is a necessary condition for the profitability of cooperative R&D arrangements with free entry. The profitability of RJV cartels depends on their size. Subsidies may be desirable in cases of larger RJVs since they are the ones which are less likely to be profitable.