Estimating the Local Productivity Spillovers from Science

We estimate the local productivity spillovers from science by relating wages and real estate prices across metros to measures of scientific activity in those metros. We address three fundamental challenges: (1) unobserved differences in metros / causality using a share shift-based instrumental variable that exploits historic variation in the mix of research in metros interacted with trends in federal funding for specific fields; (2) unobserved differences in workers using data on the states in which people are born; and (3) factor input adjustments using Shephard’s Lemma to impute production costs per unit, which must be equal across metros in equilibrium. The last approach is both powerful and quite general; it can be applied using readily-available data; and it can be used to address other questions. Our estimates show a strong positive relationship between wages and scientific research and a weak positive relationship for real estate prices. Overall, we estimate, high rate of return to research.