Spillovers and R & D incentive under incomplete information

Abstract

Spillovers of R & D outcome affect the R & D decision of a firm. The present paper discusses the R & D incentives of a firm when the extent of R & D spillover is private information to each firm. We construct a two-stage game involving two firms when the firms first decide simultaneously whether to invest in R & D or not, then they compete in quantity. Assuming general distribution function of firm types we compare R & D incentives of firms under alternative scenarios based on different informational structures. The paper shows that while R & D spillovers reduce R & D incentives under complete information unambiguously, however, it can be larger under incomplete information.