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R&D Spillovers and Innovation Policy

Paper Session

Friday, Jan. 4, 2019 2:30 PM - 4:30 PM

Atlanta Marriott Marquis, A602
Hosted By: American Economic Association
  • Chair: Philippe Aghion, Harvard University and NBER

The Intellectual Spoils of War? Defense R&D, Productivity and Spillovers

Enrico Moretti
University of California-Berkeley
Claudia Steinwender
Massachusetts Institute of Technology
John Van Reenen
Massachusetts Institute of Technology and NBER


We examine the impact of government funding for R&D on privately performed R&D and its ultimate effect on productivity growth. To deal with the potential endogeneity of where governments choose to allocate R&D funds, we use changes across countries and industries in defense R&D spending. Shocks to defense R&D are mainly driven by geopolitical factors that we argue are largely orthogonal to technology shocks. Using OECD data at the country-industry-year level, we uncover strong evidence of “crowding in” rather than “crowding out”, as increases in government funded R&D result in significant increases in private sector R&D. Specifically, a 10% increase in government financed R&D generates about 3% more privately funded R&D. Analysis of the wage and employment effects suggests that the increase in private R&D expenditures reflect actual increases in R&D employment, not just higher wages.

In a longitudinal sample of French firms, we find similar estimates of the effect of government funded R&D on private R&D, after controlling for firm fixed effects. We also uncover significant heterogeneity in the magnitude of the estimated effect. We find large effects of government funded R&D on private R&D for politically unconnected firms. For politically connected firms, we find no effect, possibly indicating that public R&D subsidies are a rent for this group of firms.

In the second part of the paper, we use our OECD data to quantify the effects on productivity. We find that increases in R&D in a country and industry pair result in sizeable productivity gains. A permanent one percentage point increase in the ratio of defense related R&D to value added is associated with a 5% increase in the annual TFP growth rate in that country-industry pair (e.g. from 1 to 1.05 percentage points a year). We estimate that the increase in US defense R&D caused by the 9/11 events, for example, generated an increase in the aggregate annual TFP growth rate of 2% in the US (e.g. from 1 to 1.02 percentage points a year). At the international level, we find that increased R&D spending by foreign governments has two offsetting effects on domestic firms. On the one hand, it deters R&D spending by domestic firms; on the other hand it creates some beneficial domestic productivity gains through industry-specific knowledge spillovers. On net, the effect of foreign R&D on domestic productivity is significantly positive (but small in magnitude), pointing to the global benefits of national R&D increases.

Production and Learning in Teams

Kyle Herkenhoff
University of Minnesota
Jeremy Lise
University of Minnesota
Guido Menzio
University of Pennsylvania and NBER
Gordon Phillips
Dartmouth College and NBER


The effect of coworkers on the learning and the productivity of an
individual is measured combining theory and data. The theory is a frictional
equilibrium model of the labor market in which production and the
accumulation of human capital of an individual are allowed to depend on the
human capital of coworkers. The data is a matched employer-employee dataset
of US firms and workers. The measured production function is supermodular.
The measured human capital function is non-linear: Workers catch-up to more
knowledgeable coworkers, but are not dragged-down by less knowledgeable
ones. The market equilibrium features a pattern of sorting of coworkers
across teams that is inefficiently positive. This inefficiency results in
low human capital individuals having too few chances to learn from more
knowledgeable coworkers and, in turn, in a stock of human capital and a flow
of output that are inefficiently low.

Back to Basics: Basic Research Spillovers, Innovation Policy and Growth

Ufuk Akcigit
University of Chicago, CEPR, and NBER
Douglas Hanley
University of Pittsburgh
Nicolas Serrano-Velarde
Bocconi University and IGIER


This paper introduces a general equilibrium model of endogenous technical change through basic and applied research. Basic research differs from applied research in the nature and the magnitude of the generated spillovers. We propose a novel way of empirically identifying these spillovers and embed them in a framework with private firms and a public research sector. After characterizing the equilibrium, we estimate our model using micro-level data on research expenditures by French firms. Our key finding is that standard innovation policies (e.g., uniform R&D tax credits) can accentuate the dynamic misallocation in the economy by oversubsidizing applied research. Policies geared towards public basic research and its transmission to the private sector are significantly welfare improving.

Entrepreneurial Spillovers from Corporate R&D

Tania Babina
Columbia University
Sabrina T. Howell
New York University and NBER


How does corporate innovation investment affect employee departures to entrepreneurship? Research and development (R&D) spending may decrease spawning if it increases firm's growth options or makes it a more interesting workplace. Conversely, R&D may increase spawning if it generates new ideas that employees can appropriate, or if it makes employees more entrepreneurial. We use U.S. employer-employee matched Census data, and instrument for R&D with changes in federal and state tax incentives. We show that R&D investment increases spawning. This effect is driven by high-tech parents and by departures to high-growth and VC-backed entrepreneurship. Intellectual rather than human capital seems to explain the spawning (i.e., new ideas rather than skills). The effect does not impose observable costs on the parent, leading us to conclude that entrepreneurial spawning is a source of knowledge spillovers from corporate R&D.
Danielle Li
Massachusetts Institute of Technology and NBER
Rasmus Lentz
University of Wisconsin-Madison
Maik Schneider
University of Bath
Charles Jones
Stanford University and NBER
JEL Classifications
  • O3 - Innovation; Research and Development; Technological Change; Intellectual Property Rights
  • H2 - Taxation, Subsidies, and Revenue