Research joint ventures and optimal R&D policy with asymmetric information

When to allow Research Joint Ventures (RJVs) or not is an important instrument in the development of an optimal R&D policy. The regulator, however, is unlikely to know all the relevant information to regulate R&D optimally. The extent to which there exist appropriability problems between the firms is one such variable that is private information to the firms in the industry. In a duopoly setting we analyze the characteristics of a second-best R&D policy where the government can either allow RJVs or not and give lump-sum subsidies to the parties involved. The second-best R&D policy without subsidies will either block some welfare improving RJVs or allow some welfare reducing ones. With lump-sum subsidies, the second-best policy trades off the expected subsidy cost with allowing welfare decreasing RJVs or blocking welfare increasing ones.