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Keywords:

  • Repeated Game;
  • Asymmetric Firms;
  • Imperfect Monitoring;
  • R and D Cooperation

This article discusses how to sustain R&D cooperation between two firms with different technological capabilities. We show that a long-term relationship combining with transfer can help to maintain mutual cooperation when the discount factor is not sufficiently large. Furthermore, the less capable firm is more likely to deviate because its payoff from the deviation is higher than that of the more capable one. Under certain conditions, the more capable firm can ‘bribe’ the less capable firm to cooperate, and both firms are better off. But the less capable firm receives more. Copyright © 2011 John Wiley & Sons, Ltd.