Contracting Institutions and R&D Collaboration Between Nonrivals in Competitive Industry Equilibrium

ABSTRACT In a duopoly model, one firm has the option to collaborate in R&D with a third party. Although collaboration can expedite innovation, the third party may unintentionally leak the innovation to the rival firm. Engaging in R&D collaboration can make the rival firm anticipate a free ride, which weakens its incentives for R&D spending. The firm can take legal action against the third party in case of information leakage. Strengthening contracting institutions improves the likelihood of success in such cases. In a competitive industry equilibrium, strengthening contracting institutions only sometimes increases R&D collaboration, industry R&D spending, and the innovation rate.