The Private Value of Innovating for the Government / Ashish Arora, Sharon Belenzon, Larisa C. Cioaca, Elia Ferracuti.

Format:

Book

Author/Creator:

Arora, Ashish.

Contributor:

Belenzon, Sharon.

Cioaca, Larisa C.

Ferracuti, Elia.

National Bureau of Economic Research.

Series:

Working Paper Series (National Bureau of Economic Research) no. w33880.

NBER working paper series no. w33880

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2025.

Summary:

We quantify the private returns to government R&D contracts awarded to firms. We present new evidence that R&D contracts not only finance innovation but also embed an implicit government guarantee of noncompetitive future procurement for the winning R&D contractor. We measure its private value by analyzing stock market reactions to news about R&D contract awards. Using all federal R&D contracts awarded to U.S. publicly traded firms from 1984 through 2015, we find that the average private return on an R&D contract is 19 times its maximum potential revenue. However, returns are highly skewed, with only 7.5% of firms receiving at least one top-quartile contract. Private returns are linked to future production contracts, but only for noncompetitive awards to vertically integrated or large firms. These results suggest that a procurement regime bundling R&D and production contracts enhances value for firms with production capability. We develop a conceptual framework to clarify this innovation policy lever.

Notes:

May 2025.

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