Scott Baker and Claudio Mezzetti

Abstract

This paper shows how firms can use threats of intellectual property disclosure to enforce R&D joint venture agreements. A multi-stage game is developed in which firms contract to (a) exchange knowledge and (b) coordinate the introduction of innovations to the marketplace. The question we address is whether firms can self-enforce such joint venture agreements. We find that, under some parameter configurations, such agreements are enforceable. In particular, we show that (1) joint ventures are straightforward to enforce when knowledge is readily transferable to fringe firms; (2) maintenance of a joint venture agreement is easier when at least one of the firm is small and financially constrained and (3) the welfare effect of such R&D joint ventures is ambiguous; depending heavily on the probability that firms will be able to innovate in the absence of knowledge exchange among them.