Risk aggregation and the efficient selection of joint projects by a consortium

This paper analyzes the impact of risk attitudes on project funding decisions in research consortia. We outline an expected utility framework and show that aggregation of risk reduces risk aversion. We analyze the effects of managerial risk attitudes on the decision making process for R&D investment. We show that when funding research projects, firms should consider projects collectively rather than individually. The pooling of risk among projects can reduce inefficiencies in funding decisions. Furthermore, we show that participation in a consortium can increase efficiency in funding decisions, as the pooling of risk among firms can also alleviate risk aversion.