Sharing Productive Knowledge in Internally Financed R&D Contests

We examine the optimal design of two-stage research and development (R&D) joint ventures. At the second stage, researchers choose R&D effort levels independently in an attempt to achieve an innovation. In the first stage, researchers have an opportunity to share endowments of productive knowledge. Initial pecuniary resources are limited, so rewards for disclosing knowledge and succeeding at the second stage must be financed from successful innovation. We derive conditions under which full sharing of knowledge and the socially desired levels of R&D effort can be motivated, and examine the optimal incentive structure when this ideal outcome cannot be implemented: full sharing will always be motivated at the first stage, but inefficient R&D effort wil be induced to foster information sharing. Copyright 1990 by Blackwell Publishing Ltd.