Essays on the Political Economy of Defense R&D and Defense Costs

Chandler S. Reilly

Advisor: Christopher Coyne, PhD, Department of Economics

Committee Members: Peter T. Leeson, Tyler Cowen

Online Location, Online
March 27, 2023, 01:00 PM to 03:00 PM


The first chapter is titled, “You Work for Us Now: Concentration in University-performed Defense R&D,” and examines the relationships between the Department of Defense and universities in the United States, focusing on the rise in concentration of funding. Concentration in university research funded by the Department of Defense (DOD) has been rising for the last several years, deviating from the trend of constant concentration in other federally funded university research. When the DOD funds defense-specific R&D projects, there are two priorities that affect bureaucratic incentives: 1) Coordination incentivizes steering research toward the specific technological ends, and 2) Security incentivizes actively limiting the risk of information leakage. Sole source research center contracts make the necessary coordination and monitoring easier to achieve. As the demand for projects that require more coordination and security increases, more spending is allocated to sole source research centers leading to increasing concentration. Spending on military research projects awarded to universities such as aircrafts and weapons rapidly increased from 2008 to 2020 with much of that spending accruing to the university research centers sponsored by the DOD. Over that period, the share of total obligations awarded to the sixteen universities that manage DOD research centers rose from 37 percent in 2008 to 59 percent in 2020.

 The second chapter, “University Affiliated Research Centers: Evasive Entrepreneurship within the DOD,” published in the Journal of Entrepreneurship and Public Policy studies the emergence of Department of Defense sponsored university research centers. The DOD has long partnered with universities and other nonprofit organizations to perform early-stage, military-related research using research centers established under long-term contracts known as Federally Funded Research and Development Centers (FFRDCs). Over the last 25 years, there has been a shift in the type of arrangement used to University Affiliated Research Centers (UARCs) that this paper argues is the result of bureaucrats acting as evasive entrepreneurs in response to changing regulations. Extending the theory of evasive entrepreneurship to bureaucrats, this chapter shows how regulations increase the cost of bureaucratic action and incentivize the creation of substitute actions to avoid those regulatory costs and capture benefits.  Once FFRDCs were federally regulated in 1990 there were strong incentives to create substitute arrangements leading to the creation of UARCs in 1996 that have ultimately replaced FFRDCs as the research center of choice for the DOD.

The final chapter, “The Political Economy of Rising Defense Costs,” uses public choice theory to explain rising defense costs. Rising defense costs in the United States have important implications for the economy and government spending priorities. Despite the Department of Defense outsourcing much of its production to private firms and spending billions on R&D, the cost of providing national security has continued to climb. This paper employs public choice theory to explain the drivers of rising defense costs. Key sets of actors, including politicians, bureaucrats, and defense contractors, have incentives to capture private benefits associated with defense spending. But there are weak incentives to cut costs such that the individuals seeking to maintain spending in areas that do not contribute to defense tend to succeed in their efforts, contributing to the observed rising costs. By examining these incentives, this paper sheds light on the underlying causes of the upward trend in defense costs. The analysis contributes to the existing literature by providing a framework for understanding the factors that contribute to rising defense costs and detailing specific examples of how those factors operate.