Association for Public Policy Analysis & Management

State support for public higher education has been declining in nearly three decades. The decline is partly due to the recession-induced fiscal crises and partly due to the crowd-out by the ever-growing Medicaid spending (Kane, Orszag, and Apostolov 2005). There are serious concerns over the implications for the quality of public higher education. Kane, Orszag, and Apostolov (2005) find that reductions in state appropriations for higher education result in larger gaps between public and private higher education institutions in faculty salaries, faculty-to-student ratio, expenditure per student, and SAT scores of incoming students. Zheng (2009) shows that there is a positive association between state funding and college graduation rates.

While public research universities produce not only college graduates but also research, there has been little work on the effect of state appropriations on research output of public universities. To my best knowledge, Husted and Kenny (2015) is the only paper on this subject. They find that a drop in state appropriations results in fewer publications by economics professors in the public university and a decline in the number and value of NIH grants obtained by the university.

To fill the gap in the literature, this paper examines the effect of state appropriations on another important research output of public research universities: patents. Relative to academic publications, patents have an arguably more direct impact on technology and the economy and have greater commercial values.

Using a panel data model with university/university system and year fixed effects, I analyze whether and how much state appropriations per full-time equivalent student affects the number of successful patent applications per one thousand full-time equivalent students. The regressions include such control variables as the number of full-time equivalent students (as a measure of school size), the number of full-time faculty, and other potential covariates.

This paper relies on two main data sources. The Integrated Postsecondary Education Data System (IPEDS) provides the information on university characteristics including funding sources. The United States Patent and Trademark Office (USPTO) publishes a report of patent applications at the university/university system level.

Preliminary results show that state appropriations have a small, positive, statistically significant effect on the number of successful patent applications of public research universities, even after taking heteroscedasticity and serial-correlation of error terms into account. The effect appears to be mostly contemporaneous, as the effect of the one-year lag of state appropriations is not significant. State appropriations tend to matter more to public research universities that rely more on state funding and that have less advanced research ability. These universities supposedly have more difficulties replacing the loss of state appropriations with alternative revenue sources. In addition, I find that the work mechanism of state appropriations in affecting patent applications is mostly through research expenditure (especially salaries and wages paid to research faculty and staff) of public universities, not through the number of full-time faculty of these universities.