European Central Bank blog research finds publicly funded R&D delivers larger spillovers and stronger productivity gains than private R&D

The European Central Bank published an ECB Blog post featuring Young Economist Prize finalist research that compares public and private R&D funding in the United States and finds that publicly funded R&D complements private investment while generating larger productivity gains due to stronger spillovers. Using US data from 1950 to 2020, the research documents a shift in R&D funding from public to private, with government-funded R&D peaking in 1964 and declining by two-thirds as a share of GDP while private R&D tripled and became the largest source in 1980. Patent-based evidence suggests publicly funded patents cite scientific papers nearly four times as often, are 19% more likely to be breakthrough innovations, and are referenced across a wider range of technology classes. Exploiting shocks to federal agency R&D spending, the estimates link a 1% increase in publicly funded patents to a 0.025% rise in firm total factor productivity, a 0.024% increase in firm patent output, and a 0.031% increase in R&D expenditures, with smaller firms benefiting more; a macro model calibrated to these estimates attributes around one-third of the post-1960 decline in US productivity growth to the reduced role of public R&D. Applications for the ECB’s 2025 Young Economist Prize will be open from 13 January to 12 February 2025.