Strategic Timing in R&D Agreements

We present a model of endogenous formation of R&D agreements among firms in which also the timing of R&D investments is made endogenous. The purpose is to bridge two usually separate streams of literature, the endogenous formation of R&D alliances and the endogenous timing literature. This allows to consider the formation of R&D agreements over time. It is shown that, when both R&D spillovers and investment costs are sufficiently low, firms may find difficult to maintain a stable agreement due to the strong incentive to invest noncooperatively as leaders. In such a case, the stability of an R&D agreement requires that the joint investment occurs at the initial stage, thus avoiding any delay. When instead spillovers are sufficiently high, cooperation in R&D constitutes a profitable option, although firms also possess an incentive to sequence their investment over time. Finally, when spillovers are asymmetric and the knowledge mainly leaks from the leader to the follower, to invest as follower becomes extremely profitable, making R&D alliances hard to sustain unless firms strategically delay their joint investment in R&D.