A Differential R&D Game: Implications for Knowledge-Based Growth Models

This paper compares the outcomes of strategic and nonstrategic research and development (R&D). Firms undertake cost-reducing R&D in an environment where benefits accrue from their rivals' R&D via a common pool of knowledge. We demonstrate that multiple suboptimal equilibria exist; under these conditions, growth models which do not consider strategic interactions will overestimate or underestimate the growth rate.