Defence innovation and procurement reform: an empirical evaluation of the US Defense Innovation Unit

Ethan Kapstein, Javier Ospital and Guntram Wolff

No 2026-17, Working Papers ECARES from ULB -- Universite Libre de Bruxelles

Abstract: Battlefields are rapidly evolving, with new technologies reshaping military strategy and tactics. Many of the new technologies originate in firms outside the traditional defence sector, rather than with the existing prime contractors. In the United States, the Department of Defense (DoD) created the Defense Innovation Unit (DIU) in 2015 to incentivise commercial tech companies to work on national security challenges. How successful has this new unit been in achieving its mission? In this article, we provide the first causal evaluation of the DIU’s effects on defence procurement. Using administrative procurement data and a firmlevel panel covering 2017-2025, and employing propensity score matching, additional firmlevel covariates and a staggered difference-in-differences design, we find that the DIU has expanded both the extensive and intensive margins of defence contracting. We find not only a significant increase in the likelihood of receiving a DoD contract because of DIU treatment, but also in the size of the contract. Our findings show that defence innovation organisations can broaden and deepen the defence-supplier base. Governments updating their defence acquisition strategies in response to the lessons from recent wars can benefit from reforms that facilitate firm entry into procurement, overcoming the transaction cost and information asymmetry problems typical in defence markets.

Keywords: defence innovation; information asymmetries; public procurement; ransaction costs; technological innovation (search for similar items in EconPapers)
JEL-codes: H57 O32 O38 (search for similar items in EconPapers)
Pages: 32 p.
Date: 2026-05-28
New Economics Papers: this item is included in nep-sbm
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Working Paper: Defence innovation and procurement reform- an empirical evaluation of the US Defense Innovation Unit (2026)
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