Does it pay to innovate first? A dynamic duopoly with R&D spillovers

We analyze a dynamic duopoly where fi rms have in each period the possibility to make a once—and—for—all R&D investment. The latter generates a cost saving innovation to the innovative firm and a spillover over the R&D investment cost of the non—innovative firm. We show, differently from D’Aspremont and Jacquemin [1988] where firms have an incentive to innovate immediately, that the spillover may induce a war of attrition equilibrium, where both firms would like the rival to innovate first. Last, by comparing the non—cooperative regime with the RJV case, we show that R&D cooperation may increase welfare even if the spillover is relatively small.