R&D; Innovation policy; Defense; Mission-oriented innovation.

O30, O31, 032, O38. H56, H57

Military Research and Development (R&D) expenditures arguably represent one of the main innovation policy levers for US policy makers. They are sizeable, with a clear-cut public purpose (national defense) and with the government being their exclusive buyer. Exploiting a longitudinal dataset linking public R&D obligations to private R&D expenditures for US states, we investigate the impact of defense R&D on privately-financed R&D. To address po- tential endogeneity in the allocation of funds, we use an instrumental variable identification strategy leveraging the differential exposure of US states to national shocks in federal military R&D. We document considerable "crowding-in" effects with elasticities in the 0.11-0.14 range. These positive effects extend also to the labor market, when focusing on employment in selected R&D intensive industries and especially for engineers.