Endogenous formation of coalitions in a model of a race

This paper examines the endogenous formation of coalitions among symmetric firms who are racing to innovate a new product or process. The probability of success depends on a coalition’s research intensity, which in turn depends on the R&D of member firms. Forming joint ventures allows firms to maintain a higher research intensity and increase their probability of success. We characterize the equilibrium coalition structure when the innovation is drastic as well as non-drastic and examine its variation with respect to input spillovers and imperfect appropriability of benefits. We also compare equilibrium and efficient coalition structures.