An analytical model is developed to study the problem of designing stable joint ventures aimed at jointly developing and supplying a new technology. The analysis focuses on the extent to which traditional motives for joint ventures like cost sharing, synergy effects or technological spillovers may shape the incentives for firms to cheat on the arrangement and hence despite larger cooperative benefits, endanger the formation of a stable agreement. The cheating firm, although supplying the contractually specified inputs to the venture, manages to keep its know-how proprietary while benefiting from the loyal partner's know-how through spillovers from the venture. Only if know-how can be kept sufficiently proprietary within the venture, will synergy effects stimulate the formation of a stable joint venture, increasing the profitability of cooperation while at the same time stifling the incentives to cheat. But if know-how becomes difficult to appropriate, synergy effects may increase the incentives to cheat, resulting in no agreement at least when both parties have perfect foresight.
