Research Subsidy Spillovers, Two Ways

Kyle  Myers; Lauren  Lanahan

Working Paper | 2020

Research Subsidy Spillovers, Two Ways

by Kyle Myers and Lauren Lanahan

Abstract

We study how the outputs of research spill over technological and geographic space in the context of the U.S. Small Business Innovation Research program. We infer input-output links using text analyses and identify the marginal costs of producing patents using noncompetitive grant matching policies. Due to technological spillovers, the costs of spurring specific types of patents are substantially larger than the costs of spurring any patent. Due to geographic spillovers, roughly 80% of the patents generated by the program are from inventors who never participate in the program. The cost effectiveness of research subsidies crucially depends on which outputs count.

Keywords: innovation; Small Business; Innovation and Invention; Patents;

Language: English

Format: Print

Citation:

Myers, Kyle, and Lauren Lanahan. "Research Subsidy Spillovers, Two Ways." Working Paper, June 2020.

This paper identifies the degree to which scientists are willing to change the direction of their work in exchange for resources. Data from the National Institutes of Health are used to estimate how scientists respond to targeted funding opportunities. Inducing a scientist to change their direction by a small amount—to work on marginally different topics—requires a substantial amount of funding in expectation. The switching costs of science are large. The productivity of grants is also estimated, and it appears the additional costs of targeted research may be more than offset by more productive scientists pursuing these grants.

We examine trends in the productivity of the pharmaceutical sector over the past three decades. Motivated by Ricardo’s insight that productivity and rents are endogenous to demand when inputs are scarce, we examine the industry’s aggregate R&D production function. Using exogenous demand shocks to instrument investments, we find that demand growth can explain a large portion of R&D growth. Returns to scale have been stable whereas total factor productivity has declined significantly. Predicted rents based on our estimates and Ricardo’s theory closely match the trends we observe.

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Research Subsidy Spillovers, Two Ways

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