Fabrizi, S., Lippert, S., 2012. Due diligence, research joint ventures, and the incentives to innovate. Journal of Institutional and Theoretical Economics 168(4), 588-611 (supported by Marsden Grant UOO0821).
The decision to cooperate within R&D joint ventures is often based on expert advice. Such advice typically originates in a due-diligence process, which assesses the R&D joint venture's profitability, for example, by appraising the achievability of synergies. We show that if the experts who advise the owners considering forming an R&D joint venture are also responsible for R&D efforts, they can have incentives to withhold information about the extent of those synergies. Owners optimally react by reducing the incentives to innovate in low-value projects developed within R&D joint ventures and in high-value projects developed within competing research organizations.