The Private Value of Innovating for the Government

Ashish Arora (), Sharon Belenzon, Larisa C. Cioaca and Elia Ferracuti

No 33880, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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.

JEL-codes: H57 O31 O38 (search for similar items in EconPapers)
Date: 2025-05
New Economics Papers: this item is included in nep-cta and nep-tid
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