Guaranteed Markets and Corporate Scientific Research

To incentivize firms to develop innovative technologies, the U.S. government awards R&D contracts that often carry an implicit promise of “guaranteed demand.” That is, firms that demonstrate superior technological capabilities are often rewarded with noncompetitive downstream procurement contracts for the resulting products and services. This is a key difference between R&D contracts and grants. Using newly assembled data on $5.9 trillion in government procurement contracts from all federal agencies matched to U.S. publicly traded firms, we document a crowding-in effect of R&D contracts on upstream corporate R&D: firms co-invest with the government at the R&D stage to increase their chances of landing lucrative downstream procurement contracts. We show that the crowding-in effect has weakened over time as the government has increasingly decoupled R&D contracts from downstream procurement. We discuss possible implications of this decoupling.