Dynamic noncooperative R&D in duopoly with spillovers and technology gap
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The purpose of this paper is to show how the dynamics of the technology gap between firms helps demarcate the opposing effects of spillovers on R&D incentives. We explore the theoretical link between spillovers as pioneered by D’Aspremont and Jacquemin (1988) (henceforth AJ) and technology gap by allowing the rate of spillovers to depend on the latter². Intuitively, when the follower lags far behind the leader it enjoys larger spillovers and has fewer incentives to conduct its own R&D, but as it moves closer to the frontier³ it is "forced" to innovate as its free riding possibility set becomes smaller. Thus, if there exists a relationship between spillovers and R&D incentives an analogous link must also exist between the latter and the level of technology gap.
² ³ See notes in chapter.