Description:

Karel Mertens (Dallas Fed): 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.