A Formal Model of Government Sponsored Research (with Applications to Solar Power Systems)

This paper analyzes the behavior of a single firm engaged in R and D for a "sponsor." We are interested in two particular aspects of the interaction between the two agents: (1) the revelation to the sponsor of new information generated by the firm's research, and (2) the firm's choice of research strategy. We show that contractual forms which provide good incentives in a static environment may introduce incentive problems in a dynamic setting. More specifically, we show that a firm engaged in a sequence of R and D contracts is more likely to do research (1) the lower are the costs of R and D, (2) the better is the state of sponsor knowledge, and (3) the longer is the sequence of contracts (given an appropriately high discount factor). We also show that the firm reveals a larger share of its results (1) the better is the state of sponsor knowledge, (2) the better is the state of private knowledge possessed by the firm, and (3) the shorter is the sequence of contracts. Finally, somewhat surprisingly, we find that the amount of information a firm reveals is independent of the costs of R and D.