Econintersect: According to a NBER Working Paper, conventional wisdom is that the social rate of return to R&D significantly exceeds the private rate of return and, therefore, R&D should be subsidized. In the U.S., the government has directly funded a large fraction of total R&D spending.
This NBER paper summary goes on to state:
This paper shows that there is a serious problem with such government efforts to increase inventive activity. The majority of R&D spending is actually just salary payments for R&D workers. Their labor supply, however, is quite inelastic so when the government funds R&D, a significant fraction of the increased spending goes directly into higher wages. Using CPS data on wages of scientific personnel, this paper shows that government R&D spending raises wages significantly, particularly for scientists related to defense such as physicists and aeronautical engineers. Because of the higher wages, conventional estimates of the effectiveness of R&D policy may be 30 to 50% too high. The results also imply that by altering the wages of scientists and engineers even for firms not receiving federal support, government funding directly crowds out private inventive activity.
This paper was from 1998 and concludes that there may be better ways to encourage R&D than to subsidize the wages of personnel. Fast forward to 2013 to this presentation by Doug Elmendorf, Congressional Budget Office (CBO) Director, at the Kauffman Foundation Conference on Federal Tax Policy and Entrepreneurship.
