Government Spending and Corporate Innovation

Abstract

I study the impact of government spending on corporate innovation. Using changes in U.S. Senate committee chairmanships as a source of exogenous variation in state-level federal government expenditures, I find that firms headquartered in states with increases in government spending significantly reduce their innovation output, as measured by their number of patents and the citations to these patents. These reductions are mostly concentrated in labor-intensive industries, in firms headquartered in states with lower unemployment rates, and in government-dependent industries. My findings suggest that resource diversion induced by increased government spending is a channel through which government spending may affect corporate innovation. This paper was accepted by Gustavo Manso, finance.