R&D Investments under Endogenous Cluster Formation

Dawid H, Hellmann T. R&D Investments under Endogenous Cluster Formation. Center for Mathematical Economics Working Papers. Vol 555. Bielefeld: Center for Mathematical Economics; 2016.We study investments in R&D and the formation of R&D clusters of firms which are competitors in the market. In a three stage game, firms first decide on long-term R&D investment, then form research clusters according to the unanim- ity game introduced in Bloch(1995), and finally compete in quantities. For some range of investment costs, equilibria with no-investment co-exist with equilibria where a large fraction of firms invest in R&D. Because of the effects of R&D investment on cluster membership, firms tend to over-invest compared to a sce- nario where research clusters are ex-ante fixed and also compared to the welfare optimum