The Returns to Government R&D: Evidence from U.S. Appropriations Shocks

RePEc Short ID: pfi368
ORCID iD: 0000-0002-3548-1153

Fieldhouse, Andrew J.; Mertens, Karel

doi:10.24149/wp2305r1

Working Paper Revision

The Returns to Government R&D: Evidence from U.S. Appropriations Shocks

Abstract: Based on a narrative classification of all significant postwar changes in R&D appropriations for five major federal agencies, we find that an increase in nondefense R&D appropriations leads to increases in various measures of innovative activity and higher business-sector productivity in the long run. We structurally estimate the production function elasticity of nondefense government R&D capital using the SP-IV methodology of Lewis and Mertens (2023) and obtain implied returns of 150 to 300 percent over the postwar period. The estimates indicate that government-funded R&D accounts for one quarter of business-sector TFP growth since WWII, and imply substantial underfunding of nondefense R&D.

Keywords: government; R&D; productivity; growth; narrative analysis;

JEL Classification: E62; O38; O47;

https://doi.org/10.24149/wp2305r1