Public contracting for private innovation: Government capabilities, decision rights, and performance outcomes

Research Abstract We examine how the US Federal Government governs R&D contracts with private‐sector firms. The government chooses between two contractual forms: grants and cooperative agreements. The latter provides the government substantially greater discretion over, and monitoring of, project progress. Using novel data on R&D contracts and on the technical expertise available in specific government bureau locations, we test implications from the organizational economics and capabilities literatures. We find that cooperative agreements are more likely to be used for early‐stage projects and those for which local government scientific personnel have relevant technical expertise; in turn, cooperative agreements yield greater innovative output as measured by patents, controlling for endogeneity of contract form. The results are consistent with multitask agency and transaction‐cost approaches that emphasize decision rights and monitoring. Managerial Abstract When one private firm outsources an R&D project to another, it can use a range of sophisticated contractual provisions to elicit proper innovative effort. However, government entities are often constrained from employing such provisions due to legal and regulatory restrictions. Policymakers thus face a difficult challenge when contracting with private firms for innovation. We study the US Federal government's R&D contracts, which are restricted to two contractual types: “grants,” which offer little in‐process oversight, and “cooperative agreements,” which provide decision rights during the project. We demonstrate that policymakers can enhance outcomes by using cooperative agreements for earlier‐stage, higher‐uncertainty projects, but only when government scientists with relevant expertise are located near the firm's R&D site.