Research joint ventures in an international economy

D'Aspremont and Jacquemin's model is extended to study alternative configurations of research agreements in a two-country integrated world economy. Under unambiguous conditions on spillovers, we show that: (1) allowing national firms to cooperate in research and development (R&D) confers them an advantage over foreign rivals, an effect similar to R&D subsidies. (2) In a policy game, each government would allow national cooperative agreements. (3) Contrary to other trade policies which lead to a “prisoners' dilemma” result, welfare in both countries increases when they both allow R&D cooperation. (4) Welfare is even higher if a generalized (international) coalition is formed.