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Indirect Cost Recovery in U.S. Innovation Policy: History, Evidence, and Avenues for Reform

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Listed:
  • Pierre Azoulay
  • Daniel P. Gross
  • Bhaven N. Sampat

Abstract

The U.S. government has funded university research for nearly 80 years, with a significant share of this funding supporting the fixed costs of science through indirect cost recovery (ICR). We explain the history, objectives, and mechanics of ICR policy and review key controversies. We also provide new empirical evidence on indirect costs at the NIH, a major target of past and present ICR reform. Using data from over 350 institutions, we find that while negotiated ICR rates average 58%, effective rates—what NIH actually pays—average 42%, with relatively little variation across institutions or over time. Our analyses also suggest that a proposed 15% at rate would significantly cut NIH funding for many grantees, disproportionately affecting institutions most linked to commercial patenting and drug development. We conclude by assessing the current system, and major reform proposals, across several ICR policy objectives: support for research and infrastructure, cost-efficiency incentives, implementation costs, and transparency. No single approach dominates on all dimensions.

Suggested Citation

  • Pierre Azoulay & Daniel P. Gross & Bhaven N. Sampat, 2025. "Indirect Cost Recovery in U.S. Innovation Policy: History, Evidence, and Avenues for Reform," NBER Working Papers 33627, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:33627
    Note: EH PE POL PR
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    References listed on IDEAS

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    1. Gross, Daniel P. & Sampat, Bhaven N., 2023. "The World War II crisis innovation model: What was it, and where does it apply?," Research Policy, Elsevier, vol. 52(9).
    2. Mikko Packalen & Jay Bhattacharya, 2018. "Does the NIH Fund Edge Science?," NBER Working Papers 24860, National Bureau of Economic Research, Inc.
    3. Ronald G. Ehrenberg & Jaroslava K. Mykula, 1999. "Do Indirect Costs Rates Matter?," NBER Working Papers 6976, National Bureau of Economic Research, Inc.
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    More about this item

    JEL classification:

    • H51 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Health
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D
    • O38 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Government Policy

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