Journal of Economic Behavior Organization Vol. 42 2000 385–404
Disclosing own subsidies in cooperative research projects
Maite Pastor Gosálbez
a
, Joel Sandon´ıs D´ıez
b,∗
a
Universitat Autònoma de Barcelona, C.E.U. San Pablo-Elx, Spain
b
Departamento de Fundamentos del Análisis Económico, Universidad del Pa´ıs Vasco, Avd. Lehendakari Aguirre 83, 48015 Bilbao, Spain
Received 25 February 1998; received in revised form 14 September 1999; accepted 29 September 1999
Abstract
This paper analyzes in a theoretical framework, including asymmetric information and uncer- tainty first, why firms participating in cooperative research projects may be interested in hiding
information about own subsidies to their partners and second, whether the public disclosure of subsidies would be welfare improving. We show that the answers to those questions depend mainly
on whether the efforts are strategic complements or substitutes and on the way in which the firms ex ante share the total expected profits from the project. © 2000 Elsevier Science B.V. All rights
reserved.
JEL classification: D82; O31; O38 Keywords: Cooperative RD; RD subsidies; Public disclosure of subsidies
1. Introduction
Gaps between social and private incentives may lead to suboptimal levels of RD, which justifies public intervention in the innovation process. Reasons for that divergence include
the public good nature of RD, implying that private firms can not fully appropriate the results of their RD investments, the existence of economies of scope and scale in RD, un-
certainty over the results, asymmetries of information, or suboptimal diffusion of RD out- puts. One way to overcome market failures is direct RD subsidization. Another is to relax
antitrust policies, allowing private firms to cooperate in RD projects. The latter policy has been implemented in recent years in Europe, the USA and Japan and has received substantial
attention in economic literature. Among others, we can mention Katz 1986, d’Aspremont and Jacquemin 1988, Kamien et al. 1992, Suzumura 1992 and Katsoulakos and Ulph
∗
Corresponding author. Tel.: +34-4-6013823; fax: +34-4-6013774. E-mail address: jepsadijbs.ehu.es J.S. D´ıez
0167-268100 – see front matter © 2000 Elsevier Science B.V. All rights reserved. PII: S 0 1 6 7 - 2 6 8 1 0 0 0 0 0 9 5 - 0
386 M.P. Gos´albez, J.S. D´ıez J. of Economic Behavior Org. 42 2000 385–404
1998. Some of the advantages of RD cooperation are well known, such as internaliz- ing spillovers and facilitating the dissemination of proprietary firms’ know-how and RD
outputs. This enables firms to capture economies of scale, critical resources, skills or spe- cialization that they would be unable to obtain alone, to share risks and sunk costs, and to
avoid needless duplication of efforts.
On the other hand, probably due to the huge amount of money used by governments to subsidize RD projects, the effectiveness of those subsidies has been the subject of several
empirical and theoretical works. Interestingly, many of these works report that the effect of subsidies on RD efforts is weak. Among others we can mention Fölster 1995, Rubinstein
et al. 1977 and Mart´ınew-Sánchez and Navarro 1991. In a theoretical paper, Kauko 1996 shows that the inefficiency of subsidies may reflect strategic oligopolistic behavior. He
shows that not to apply for subsidies is a strategic commitment to non-aggressive behavior. In particular, firms may be willing to apply for subsidies mainly when they are not going
to affect their RD efforts significantly.
In other works, different kinds of RD subsidies are compared. Pérez-Castrillo and Verdier 1993 show that in a perfect information context and from a budgetary point of view,
a government prefers to subsidize RD costs than to award an additional prize to the patent. However, Pérez-Castrillo and Sandon´ıs 1996 show that in cooperative RD projects
characterized by cost uncertainty, cost subsidies could negatively affect the incentives of the partners to share their know-how, while patent subsidies could be a help. Curiously,
only cost subsidies are used in Europe.
Cooperative research and development programs, such as those encompassed by the European Union EU Technology Framework Program, have become well-established
tools of European research policy. However, the EU is not the only institutional locus for European cooperative RD. For example, Eureka was launched in 1985 as a pure
intergovernmental mechanism following an initiative by the French government. It was formed by the six European Free Trade Association EFTA states and Turkey as well
as by the EU states. Eureka allows governments to fund downstream, product-oriented, near-market cooperative projects without the restrictions placed by EU competition law on
the Framework Program, which limits it to more upstream, generic precompetitive RD Peterson, 1993. Organizationally, Eureka is very simple. The central bureaucracy is kept to
the barest minimum. Eureka exists only as a small secretariat, which serves no administrative function. Rather, periodic ministerial meetings approve projects for the Eureka ‘label’.
Member States are then free to select approved projects to fund. States fund their own firms and no funding crosses borders Watkins, 1991.
Interestingly, Peterson reports that a high percentage of the firms participating in Eureka projects complain about the fact that they do not know whether their partners are being
subsidized by their own governments. Trying to explain that empirical observation one can observe, first, that Eureka’s loose rules on information exchange between governments
make that lack of information possible. Second, it implies that, in many cases, the subsidized firms prefer to hide that information to their partners.
In this paper, we try to provide a theoretical explanation for that empirical observation. We want to explain first, why firms may have incentives not to disclose information about own
subsidies and, second, whether the imposition of stricter rules regarding the public disclosure of information on subsidies in programs such as Eureka would be welfare improving.
M.P. Gos´albez, J.S. D´ıez J. of Economic Behavior Org. 42 2000 385–404 387
The remainder of the paper is organized as follows: Section 2 presents the model. Sections 3–5 solve the stage of efforts, analyze the participation decision and enter into firm 1’s
