Complementary and Substitutive Effects of Public R&D Funding on Private Investment at U.S. Universities.

This paper seeks to build upon the current literature examining whether federal funding of R&D projects at U.S. universities acts as a complement or a substitute to private investment. The analysis begins by building upon the framework set forth by Payne (2001), which suggests that public funding acts as signal of institutional quality to private investors. This paper utilizes panel data on virtually every research university in the country from 1975 - 1999 to determine if investors receive signals stemming from the distribution of university resources. This paper also looks at whether the source of government funds matters in terms of the strength of the signals broadcast to private investors. Results from an OLS regression using institutional fixed effects support both hypotheses. Finally, possible issues resulting from non-stationarity and cointegration are explored using a Single Equation Error Correction Model. The results from this estimation suggest that federal and private funding may interact in a long-run equilibrium, but only when changes in federal funding are treated as the dependent variable. [ABSTRACT FROM AUTHOR]