Increases in defense spending – the largest portion of discretionary government spending in the U.S. – are negatively associated with private sector firm innovation measured using various patent-based proxies. A central finding in our study is that the extent to which government spending...

We show that the extent to which government spending hinders private sector innovation is highly dependent on a firm's revenue sensitivity to consumer demand. The effects are stronger for firms that are more dependent on internal financing to fund innovative activity such as firms with high...