Government Subsidies and Incentives for R&D Collaboration

While both the determinants of R&D collaborations and the effects of government funding on private R&D expenditures have received considerable attention individually, the effect of their interaction on incentives for firm collaboration is not well understood. This paper develops a theoretical model which can explain a previously overlooked empirical finding: R&D collaborations that receive government funding are significantly smaller than those that don’t. The model finds that government R&D subsidies can crowd out large collaborations under very general conditions even if additional firms offer unique intellectual capital to research projects or if firm-specific intellectual capital and R&D funds are compliments, leading to a potential increase in market prices. While subsidies decrease the size of collaborations which would have occurred anyway, there is evidence that they could spur new R&D collaborations.