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Research Department Working Papers

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

No. 2305 (Revised December 2023)
Andrew J. Fieldhouse and Karel Mertens

Abstract: We estimate the causal impact of government-funded R&D on business-sector productivity growth. Identification is based on a novel narrative classification of all significant postwar changes in appropriations for R&D funded by five major federal agencies. Using long-horizon local projections and the narrative measures, we find that an increase in appropriations for nondefense R&D leads to increases in various measures of innovative activity, and higher 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 about one quarter of business-sector TFP growth since WWII, and generally point to substantial underfunding of nondefense R&D.

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