Public Contracting for Private Innovation

Abstract

We examine how the U.S. Federal Government selects governance structures for R&D contracts with private-sector firms. The government chooses between two contractual forms – grants and cooperative agreements – where the latter provides the government with substantially greater decision rights over, and monitoring of, project progress. Using novel data both on R&D contracts and on the technical expertise available in specific government bureau locations, we test implications from the organizational economics and capabilities literature. We find that cooperative agreements are more likely to be used for early-stage projects and when the local government bureau personnel have relevant technical expertise; in turn, cooperative agreements yield greater innovative output as measured by patents and citations, controlling for the endogeneity of contract form. The results are consistent with multi-task agency and transaction cost approaches that emphasize decision rights and monitoring. In addition, in the course of our empirical work, we develop human capital measures of government capabilities by discipline and geography.