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Is Federal Academic Research and Development Subsidy a Complement or Substitute for State Funding?

Author: YONGHONG WU and DAVID MERRIMAN
Published in PFM, Vol. 17 No. 1

We use panel data regressions on US federal and state R&D funding at public universities during 1985-2012 to estimate whether federal academic R&D subsidy is a complement or substitute for state funding of academic research. The results indicate a statistically significant but modest substitution effect. We further find that there is essentially no substitution during periods of rapid growth of federal R&D spending. However, during periods of relatively slow growth in federal funding, the substitution effect is substantial―a one dollar cut below the average growth rate of federal funding leads to an increase of about 65 cents above the average growth rate of state funding.

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