An Analysis of Cooperative Research and Development

I analyze the effects of cooperative research, whereby member firms agree to share the costs and fruits of a research project before they undertake it. In this model industrywide agreements tend to have socially beneficial effects when the degree of product market competition is low, when there are R&D spillovers in the absence of cooperation, when a high degree of sharing is technologically feasible, and when the agreement concerns basic research rather than development activities. I show that a royalty-free cross-licensing agreement among any number of firms lowers the equilibrium level of innovation even though it increases the efficiency of R&D through sharing.