Working Paper: NBER ID: w2745
Authors: Frank R. Lichtenberg
Abstract: A relatively obscure defense procurement policy establishes a large subsidy to private military R&D investment. On the surface, it appears that the marginal subsidy to such investment is zero, but this is only true in the short run. Due to DOD's policy of allowable-cost determination, the long-run subsidy is substantial. It is much larger, in fact, than the subsidy provided by the R&D Tax Credit enacted in 1981. I calculate the subsidy by estimating an econometric model using contractor-level data from the Defense Contract Audit Agency. This subsidy may have an important influence on the amount and character of privately financed innovation in the U.S.
Keywords: Defense Procurement; R&D Subsidies; Military Innovation; Economic Performance
JEL Codes: H56; L65; O31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| DoD's policy on allowable costs for independent R&D (O32) | subsidies for private military R&D investment (H56) |
| subsidies for private military R&D investment (H56) | overall quantity and composition of R&D investment (O32) |
| subsidies for private military R&D investment (H56) | shift towards military R&D at the expense of civilian R&D (H56) |
| DoD's policy on allowable costs for independent R&D (O32) | long-run marginal subsidy to contractor independent R&D investment (O38) |
| negotiated ceilings (E64) | future funding and investment decisions (G31) |