# University Affiliated Research Centers: Evasive Entrepreneurship within the Department of Defense

Chandler S. Reilly (2023). Journal of Entrepreneurship and Public Policy.
DOI: https://doi.org/10.1108/JEPP-01-2022-0012

## Abstract

Purpose – The Department of Defense (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. Design/methodology/approach – Extending the theory of evasive entrepreneurship to bureaucrats, the author shows how regulations increase the cost of bureaucratic action and incentivize the creation of substitute actions to avoid those regulatory costs and capture benefits. Qualitative evidence from DOD documents is used to support the contention that UARCs serve the same function as FFRDCs. Quantitative evidence on the number of FFRDCs and UARCs and their funding illustrates how bureaucrats respond to political restrictions. Findings – Bureaucrats have little to no recourse to respond to budgetary cuts or spending ceilings. In the case of FFRDCs, spending ceilings were introduced starting in the 1960s and led to a decline in the number of DOD FFRDCs. Bureaucrats can however strategically evade new regulations by reorganizing transactions justified by existing federal law that contradicts new regulations. 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. Originality/value – The article makes three contributions. First, it applies the concept of evasive entrepreneurship to a political context and then use that framework to understand the creation and establishment of the DOD's UARCS. Second, the organizational features and purpose of UARCs are analyzed. Third, the evidence provided shows how regulations resulted in a shift in the DOD's R&D strategy toward working with universities.

## 1. Introduction

The effects of institutions on entrepreneurial behavior in a market setting have long been analyzed by economists. Baumol (1990) argued there is productive (i.e. value added) and unproductive (i.e. rent seeking) entrepreneurship which are contingent upon the set of institutions that influence the profit opportunities entrepreneurs face. Coyne and Leeson (2004) contribute to these distinctions in the entrepreneurship literature by developing the concept of evasive entrepreneurship. Evasive entrepreneurship refers to individuals seeking to avoid restrictions or regulations to gain advantage or exploit a profit opportunity (Coyne and Leeson, 2004; Elert et al., 2016). This paper applies evasive entrepreneurship to a political context explain the emergence of University Affiliated Research Centers (UARCs) used by the Department of Defense (DOD).

In a political context, there will be instances where the interests of legislators and bureaucrats come into conflict. Legislators will attempt to restrict the behavior of bureaucrats, bringing it back in alignment with the interests of legislators, when those conflicts occur. Bureaucrats can act as evasive entrepreneurs to avoid those regulations and continue pursuing their interests. As an example of this, I show that bureaucrats in the DOD evaded regulations imposed on Federally Funded Research and Development Centers (FFRDCs) by establishing UARCs. The research center case is a clear example where bureaucratic and legislative interests came into conflict and bureaucrats had discretion to strategically respond to restrictions imposed by legislators. Starting in 1996, the DOD began establishing UARCs in universities across the United States. UARCs are long-term arrangements between a DOD sponsor and a university used to maintain what are considered essential engineering and research functions for national defense (Department of Defense, 2010, p. 2). Data on DOD R&D contracts show that total obligations to UARCs from 2008 to 2020 have averaged around $1.5 billion, making up a majority of the DOD's R&D obligations to universities.

For decades prior to the existence of UARCs, the DOD had similar long-term arrangements with universities and other nonprofit organizations called FFRDCs.[^1] Most of the UARCs established in 1996 had at one point been FFRDCs before being reorganized. Two advantages of UARCs and FFRDCs are that they can be awarded sole-source research funding which allows the DOD to avoid the competitive requirements typical in federal acquisition and are broad long-term agreements that facilitate responsiveness to changing goals. If both types of research centers share these and other characteristics, what changed to cause the DOD's shift toward UARCs?

[^1]: FFRDCs were also known as Federal Contract Research Centers (FCRCs). These terms refer to the same long-term research arrangements that preceded UARCs.

This paper argues that the establishment and use of UARCs by the DOD can be understood as an evasive entrepreneurial response to the codification and regulation of FFRDCs in the Federal Acquisition Regulations (FAR) in 1990. The FAR regulations restricted the DOD's ability to establish new FFRDCs and fund existing ones (Dale and Moy, 2000; U.S. Congress, 1995). Although pre-existing DOD FFRDCs continue to receive funding to this day, only two DOD FFRDCs were established after the 1990 regulations, both of which were decertified shortly after their establishment. To continue funding early-stage research on a long-term basis as it had for decades, the DOD created the UARC designation under existing federal law that avoided the new regulations while maintaining the desirable features of FFRDCs in addition to their performance of early-stage research for the DOD. Those features include (1) a long-term arrangement between a DOD component and private sector organization, (2) a predefined set of research focuses, (3) eligibility to receive sole-source funding and (4) restrictions on competing with other contractors for contracts solicited by their sponsor.

The paper makes three distinct contributions related to different strands of the literature. The first contribution is the application of evasive entrepreneurship to bureaucratic behavior. Bureaucrats, like market entrepreneurs, will act in evasive ways to capture benefits when new regulations are introduced that prohibit specific behaviors given pre-existing discretion over the area being regulated and institutional contradictions that can be exploited. This contribution ties the paper to the literature on the effects of institutions on entrepreneurial behavior including the portion of that literature specifically concerned with evasive entrepreneurship (Baumol 1990; Boettke and Piano, 2016; Bylund and McCaffrey, 2017; Coyne et al., 2016; Coyne and Leeson, 2004; Elert and Henrekson, 2016; Elert et al., 2016; Hanoteau and Vial, 2020; Henrekson and Sanandaji, 2011; Strow and Strow, 2018; Thierer, 2020); and the public choice literature (DiLorenzo, 1988; Hazlett and Reilly, 2022; Holcombe, 2002; Klein et al., 2010; Tullock, 1965). The broader literature on the relationship between institutions and entrepreneurship primarily aims to understand how differences in institutional settings will affect entrepreneurs in a market setting. The portion of the literature that analyzes evasive entrepreneurship deals with how entrepreneurs can subvert existing institutions in the pursuit of profit and in some cases as an avenue for innovation. For example, Thierer (2020) details several examples of evasive entrepreneurship in recent decades including ride share services, biohackers, autonomous vehicles and drone technology. The public choice literature applies the tools of economics, including entrepreneurship, to politics. In this vein, my contribution is to extend those insights by examining a topic not examined in the literature until now; evasive entrepreneurship among bureaucrats.

The second contribution is to explain the organizational features and purpose of UARCs as used by the DOD. UARCs are primarily organized to advance early-stage research in areas relevant to the mission of the DOD while also maintaining a supply of scientists with the skills necessary to perform that research. This contribution is related to the literature on university-based research centers (Boardman and Corley, 2008; Boardman and Gray, 2010; Gibson et al., 2019; Sabharwal and Hu, 2013). The literature on university-based research centers analyzes the organizational features, purposes and effects on research productivity of university research centers whether funded by the university itself, industry or the government.

The final contribution is to show that the establishment and use of UARCs over the last 25 years represents a change in DOD R&D strategy toward working with universities on a more long-term basis as it did following the Second World War and throughout the Cold War. The related literature to this final contribution is that on the economics of defense-related R&D (Blanken and Lepore, 2011; Chubin, 1985; Coyne and Bills, 2018; Howell et al., 2021; Libaers, 2009; Moretti et al., 2020; Mowery, 2012; Rogerson, 1989; Ruttan, 2006).

The rest of the paper proceeds as follows. Section 2 extends the theory of evasive entrepreneurship to bureaucratic action. The interests of bureaucrats and politicians can diverge, and when they do, legislators will restrict bureaucratic action. When bureaucrats have discretion with respect to the action being restricted there will be incentives to avoid the restrictions. Section 3 provides background information on FFRDCs and UARCs as used by the DOD. In this section, I show the similarities between the two research centers to argue that they serve the same function to the DOD, making them close substitutes. Section 4 studies the establishment of UARCs understood as an instance of bureaucrats acting as evasive entrepreneurs. Throughout the 1960s and into the 1980s there were budgetary ceilings on the use of DOD FFRDCs. The budget ceilings led to a decline in the number of FFRDCs as DOD bureaucrats have limited discretion over their budget. By 1990 FFRDCs were formally regulated. Regulations increased the cost of using FFRDCs but also led to institutional contradictions that could be exploited, incentivizing the creation of UARCs. Section 5 concludes.

## 2. Bureaucrats as evasive entrepreneurs

Elert and Henrekson (2016) develop a theory of evasive entrepreneurship based on the original concept from Coyne and Leeson (2004). The definition of evasive entrepreneurship as proposed by Elert and Henrekson (2016) is, "profit-driven business activity in the market aimed at circumventing the existing institutional framework by using innovations to exploit contradictions in that framework" (96). While their definition is certainly fruitful for analyzing market-based responses to regulation such as Uber, the Pirate Bay, or 3D printing (Elert et al., 2016; Thierer, 2020), it can be extended to understand how individuals such as bureaucrats acting within a political context evade existing institutions for their own benefit. In a political context, legislators acting as principals will attempt to shape the behavior of their bureaucratic agents to achieve the goals associated with government spending. Legislators will regulate bureaucratic behavior, and bureaucrats will under certain conditions evade those regulations to capture gains, not unlike evasive entrepreneurs in the market.

The following three premises further motivate the extension of evasive entrepreneurship to bureaucrats acting within political institutions. First, bureaucrats are self-interested actors whose interests are not wholly dependent on the interests of legislators (Niskanen, 1968; Tullock, 1965; Peters 2010).[^2] Bureaucrats have some pre-existing level of discretion (in addition to being self-interested actors) such that they have the capacity to act entrepreneurially. To act entrepreneurially in the context of bureaucracy is intended along the lines of public entrepreneurship as discussed by Klein et al. (2010). Entrepreneurship is not "a specific individual or type of firm but [a] function that can be performed by a variety of individuals under varying circumstances" (Klein et al., 2010, p. 2). The "function" includes alertness to opportunities for gain, judgment to invest resources for uncertain rewards and innovation and are with respect to action in line with a bureaucrat's private gain. When bureaucrats act in their entrepreneurial capacity, there is the potential that bureaucratic interests come into conflict with the interests of legislators.

[^2]: Mueller (2003, pp. 359–385) provides an extensive treatment of the development and evolution of modeling bureaucrats based on the self-interest assumption in the public choice literature.

Second, when bureaucratic action leads to outcomes that conflict with legislators' interests, legislators acting as regulators can introduce restrictions that will increase the cost or otherwise constrain specific bureaucratic actions (Rowley and Elgin, 1988, pp. 287–288). Lastly, when institutional contradictions arise from restrictions imposed by legislators, bureaucrats will be more likely to have the opportunity to engage in evasive entrepreneurship.

### 2.1 Bureaucratic entrepreneurship

Political entrepreneurship has been the subject of study in the public choice literature with one of the earliest examples found in Wagner (1966). Wagner (1966) and later Holcombe (2002) develop the use of entrepreneurial concepts as applied to pressure groups and politicians in search of profit opportunities generated through political processes. Klein et al. (2010) put forth a theory of public entrepreneurship intended to cover the actions of a multitude of political actors including bureaucrats. More recently, Hazlett and Reilly (2022) analyze bureaucratic entrepreneurship specifically and use it to understand the strategies employed by bureaucrats to capture politically appropriated resources. This strand of research is related to the rent-seeking literature[^3] but differs in that it attempts to understand how entrepreneurial functions manifest and are influenced by political institutions among political actors rather than assuming the existence of rents and analyzing the incentives those rents create for political actors. While there are of course limitations to the application of entrepreneurial concepts to bureaucrats and politics more generally (Klein et al., 2010), it is also the case that entrepreneurship is naturally extended to the political as it is one of the core features of individual action (von Mises, 1949; Henrekson and Sanandaji, 2011).

[^3]: See, Tullock (1993) for an overview of the economics of rent-seeking and Hillman (2013) for a more updated review of the rent-seeking literature.

The institutional arrangement of a state such as the United States federal government is organized to create a division of labor where legislators create bureaus, and those bureaus carry out some mandated function of the state. The bureaucrats staffing these bureaus necessarily have some level of individual freedom to produce output and/or conduct policy to meet the goals of the bureau (Tullock, 1965, p. 192). The tension between the legislators' interests and the interests of bureaucrats (which can be pursued to the extent that individual freedom is granted to bureaucrats) leads to potential principal-agent problems extensively covered in the literature.[^4] From the perspective of the bureau, however, those principal agent problems can represent opportunities for bureaucrats to act in their own interest.

[^4]: See for example, Weingast (1984) which develops an analytical framework for understanding the relationship between Congress and bureaucrats and applies it to the Security and Exchange Commission, a regulatory bureaucracy.

The budget maximizing theory of bureaus, commonly used in the public choice literature, assumes that bureaucrats have a primary interest in increasing their budgets (Niskanen, 1968; Peters, 2010), but the interests of bureaucrats need not be limited to budgets.[^5] Bureaucrats have an interest in expanding their operations, increasing the power of the bureau, maintaining the status quo of arrangements with outside contractors, or advancing their careers. That list is not intended to be exhaustive; bureaucrats have numerous ways to capture benefits associated with their position that "are complex and often ill-specified" (Klein et al., 2010, p. 5). These desires do not necessarily depend directly on the level of the bureau's budget. For example, a high-level bureaucrat may find it in her interest to forgo an increase in budget if it meant ceding some power to an agency other than her own.

[^5]: Rowley and Elgin (1988) discuss at length how the budget-maximizing bureaucrat model takes the budget as a proxy for the varied interests of bureaucrats as well as other attempt to further flesh out bureaucratic interests in the public choice literature.

By accounting for bureaucratic interests outside the scope of the budget, we can better understand the opportunities bureaucrats may face to act entrepreneurially both across and between levels of institutions (Bylund and McCaffrey, 2017). For instance, Hazlett and Reilly (2022) consider the ability of bureaucrats to act entrepreneurially through the creation of rents for private parties. They show that by altering regulations which affect the ability of universities to price discriminate, bureaucrats within the Department of Education increased support for bureau activities as seen by increased lobbying activity. In this case, bureaucrats change the institutional constraints at the level of rules and regulation to affect outcomes at the institutional level of resource allocation.

A natural question that arises when discussing entrepreneurial action in a political context is whether those actions are productive or unproductive (Baumol, 1990). That is, should we expect bureaucratic entrepreneurship to create value or primarily be rent-seeking? The strand of the public choice literature dealing with political entrepreneurship such as DiLorenzo (1988) and Holcombe (2002) argue that because profit opportunities for political entrepreneurs typically arise through the forceful transfer of resources, it is likely that political entrepreneurship takes on at best unproductive characteristics and at worse, predatory characteristics. Furthermore, even if bureaucrats faced incentives to act altruistically there is no guarantee that those decisions would systematically lead to value creation absent the mechanisms that make the efficient allocation of resources possible such as market prices (Boettke and Leeson, 2004; Klein et al., 2010).

Though these concerns may lead one to believe that entrepreneurial bureaucrats exclusively act in unproductive or predatory ways since they operate in largely the same set of institutions as political entrepreneurs, there is theoretical ambiguity with respect to the ultimate welfare effects of any individual entrepreneurial effort among bureaucrats. As Henrekson and Sanandaji (2011) put it, "societies enjoy a mix of incentives; political entrepreneurship is allocated to both productive and unproductive/destructive institutional reform efforts" (p. 58). Similarly, we can expect that in some cases bureaucratic incentives will lead to entrepreneurship being allocated to productive efforts (i.e. bureaucratic incentives are aligned with value creation), so we cannot assume that bureaucratic entrepreneurship is limited to unproductive rent-seeking. In section 2.3 below, I discuss in more detail why this is the case with respect to evasive entrepreneurship among bureaucrats specifically.

Given the ability and incentives to act as entrepreneurs in addition to the tension between their own interests and those of legislators, opportunities will arise for bureaucrats to act as evasive entrepreneurs as would be the case for entrepreneurs in the market. The conditions for bureaucratic evasive entrepreneurship are akin to those proposed by Elert and Henrekson (2016): (1) There must be some regulation or restriction on bureaucratic behavior that constrains their ability to exploit opportunities for gain, (2) bureaucrats must be able to recognize that if the regulation is evaded that opportunities for gain can be exploited and (3) the ability to evade a regulation depends on the existence of institutional contradictions.

### 2.2 Regulation of bureaucratic activity

Legislators can act to control the bureaucracy in many ways, but for the purposes of this paper I assume that restrictions fall into one of two categories.[^6] First, legislators can impose budgetary restrictions. Whether in the form of outright reductions in budget or the establishment of spending ceilings, these restrictions are used to reduce the scale of specific programs, or in the extreme, eliminate a program entirely. Second, politicians can impose regulations that govern bureaucratic behavior through the formal definition of its activities, explicit limitations on the scope of activity and/or monitoring measures to enhance compliance. Regulations serve a similar purpose as budgetary restrictions, reducing the scale of specific programs, but this is achieved by increasing the cost to bureaucrats rather than shifting in the budget constraint.

[^6]: See Hammond and Knott (1996, pp. 122–123) for an overview of the literature on legislative control of bureaucracies.

The introduction of political restrictions directed at bureaus within the government creates the potential for institutional contradictions to arise. Institutional contradictions are "best understood as inconsistencies, gaps or loopholes in institutional frameworks" (Elert et al., 2016, p. 5). The extent to which these contradictions exist will depend on the type of restriction being used. Budgetary restrictions will tend to have limited contradictions. A budgetary restriction is a straightforward attempt to limit the scale of bureaucratic activity by reducing the level of resources available to a bureau for a specific purpose. The budget appropriation process involves the heads of bureaus drafting budget proposals that serve as the starting point for legislation determining spending levels during the fiscal year. Legislators take those proposals as an input into the draft legislation that will authorize spending. At this point in the process, legislators can make amendments to revise proposed budgets up or down. The ultimate determination of a bureau's budget lies with the legislators. Bureaucrats will have limited recourse to strategically respond to budget cuts due to this constraint.

In contrast to issues directly related to their budgets, bureaucrats have more individual freedom with respect to how output is produced, or policy is implemented. Institutional contradictions are more likely to arise in regulations intended to limit the freedom that bureaucrats have in these areas for two reasons. First, overlapping sets of regulations increase the complexity of rules and therefore present more opportunities for loopholes or potential gaps in enforcement. Second, regulations are not imposed by a single rule making authority. Rather, rules are created and implemented through the actions of legislators making collective decisions based on votes and enforced by other parties interpreting the regulations. The informational content of the existing set of rules makes for an insurmountable cost to ensure that new rules do not contradict existing rules.

### 2.3 Evasive response to regulations

When bureaucrats have discretion over their activities and institutional contradictions arise through imperfect regulations there will be opportunities to evade regulations and pursue the interests of the bureau. Bureaucrats have pre-existing discretion over the organization of production whether internally or through contracts with private parties. This discretion includes decision-making power over type of contract, the length of the agreement and other conditions that aid the bureau in achieving its goals based on existing rules. The existing set of rules and regulations govern bureaucratic action and politicians may impose new regulations to curtail certain behaviors. Inconsistencies across regulations create opportunities for bureaucrats to evade those regulations similar to the opportunities for market entrepreneurs to do the same (Elert et al., 2016). Self-interested bureaucrats will act to avoid regulatory costs by changing the structure of transactions such that regulations do not apply.

In regulating bureaucratic behavior, legislators face a tradeoff between limiting undesirable behavior and introducing costs that will inhibit bureaucrats from producing the output legislators expect of them. The more comprehensive regulations become, the more limiting they are on bureaucratic activity, coming at a cost to legislators trying to implement spending programs carried out by bureaucrats. As a result, some level of freedom must be maintained for bureaucrats to perform their mandated functions. Given that freedom and the existence of institutional contradictions that arise as new regulations are implemented, there will be strong incentives for bureaucrats to act as evasive entrepreneurs.

Note that the evasive response by bureaucrats depends both on their ability to do so based on existing constraints and institutional contradictions as well as the opportunity to benefit in some way by evading the regulations imposed by legislators. Consider politically imposed budget cuts or spending ceilings. Bureaucrats participate in the budget setting process through the development of budget requests that are submitted as a part of the president's bill for spending in a fiscal year (Thorpe, 2014). After this point, however, the budget is ultimately up to legislators as discussed above. Through this process, legislators can introduce restrictions on spending. Existing constraints on bureaucratic control of budget levels and the lack of institutional contradictions that arise through this process make it unlikely that bureaucrats will be able to evade budgetary restrictions. Simply put, the opportunities to gain by exploiting a loophole are unlikely to exist and therefore the opportunities for bureaucrats to evade budgetary restrictions will be limited. This is not to say that bureaucrats have no influence over their budgets. Bureaucrats can act to stimulate demand for their services and their requests act as a starting point for the budget, but these actions are consistent with the existing institutional framework and would not constitute evasion as discussed here.

Evasive entrepreneurship as applied to bureaucratic behavior consists of bureaucrats capturing benefits by avoiding impositions from legislators that attempt to restrict the bureau in some way. The benefits that are captured through evasion can take the form of maintaining existing relationships with contractors, or continuing work that contributes to the bureau's goals and therefore has bearing on its future budget appropriations, to name just two possibilities. Whether these actions are ultimately productive or unproductive depends on the regulation being evaded and the objectives of the bureaucrat.

Consider two hypothetical instances of evasive entrepreneurship among bureaucrats. First, suppose there are strict personnel regulations in government hiring that restrict bureaucrats' ability to find the best people for the job. If there were a way for the bureaucrat to avoid this regulation, then we might have an example where that evasion is efficiency enhancing, assuming the bureau is producing something of value for society. In contrast, suppose that there are regulations intended to limit the rule making power of a bureaucracy but that the bureaucrats figure out a way to get around that constraint and increase their ability to make rules. To the extent that those rules impose costs on society and create disincentives for production, the evasiveness would not be efficiency enhancing even though the bureaucrats gain from it. Therefore, it is possible that evasive entrepreneurship among bureaucrats can be either productive or unproductive as is the case for evasive entrepreneurship more generally (Hanoteau and Vial, 2020, p. 98).

In the sections that follow, I use the application of evasive entrepreneurship among bureaucrats to explain the shift in the Department of Defense's use of contracted research centers in the wake of regulation.

## 3. FFRDCs and UARCs

### 3.1 Federally funded Research and Development Centers

In Second World War, university-based laboratories were recipients of research funding from the Office of Strategic Research and Development (OSRD) intended to develop technology that would aid in the country's war efforts (U.S. Congress, 1995, p. iii). One of the more famous projects associated with these laboratories was the Manhattan project focusing on nuclear weapons technology which began in several universities before being moved to Los Alamos laboratory managed through contracts with the University of California (Geiger, 1993, pp. 7–8; Kealey, 1996; Ruttan, 2006).[^7] Other universities receiving funding for military-related research during this time include Massachusetts Institute of Technology (MIT), California Institute of Technology, Johns Hopkins University, University of California Berkley, Harvard, Columbia and Princeton (Geiger, 1993, pp. 10–11). The research relationships with universities eventually led to the creation of research centers now known as FFRDCs.

[^7]: Los Alamos laboratory continues to exist today as a FFRDC sponsored by the Department of Energy.

*Table 1 is available in the published version.*

Today, the DOD manages ten FFRDCs. Table 1 shows the DOD sponsor of each FFRDC, the administrator and type of FFRDC. Although universities were once more numerous among DOD FFRDCs, the remaining FFRDCs are now more commonly administered by nonprofit organizations such as the RAND corporation and focus on areas of research outside traditional R&D. MIT's Lincoln Laboratory was one of the original FFRDCs and has been performing defense research since Second World War prior to its FFRDC designation. Note that the FFRDCs included in Table 1 are those only directly sponsored by the DOD. FFRDCs sponsored by other federal departments or agencies may receive funding from the DOD if the work falls within the scope of its mission.

### 3.2 University Affiliated Research Centers

UARCs, as defined by the DOD are, "research organizations within a university or college that are established to provide or maintain essential engineering research, and/or development a long-term strategic Defense, 2013, p. 3). Today, there are currently fifteen UARCs, fourteen of which are managed by one of the branches of the military or other DOD component.[^8] Unlike FFRDCs, UARCs are not defined in federal regulations and instead are a designation formed internally by the DOD. Table 2 shows all fourteen UARCs currently managed by the DOD, their affiliated

[^8]: The only UARC not operated by a DOD agency or military branch is the Ames Research Center operated by the National Aeronautics and Space Administration (NASA) and affiliated with the University of California, Santa Cruz.

The original six UARCs were established in 1996 and include the John's Hopkins University Applied Physics Laboratory (JHU-APL) which tends to be the most well-funded of all the UARCs.[^9] Prior to a UARC being established, the associated university typically has a history of working with the DOD in a research capacity. For example, the JHU-APL has been doing defense research since Second World War under various arrangements including its previous FFRDC status. All other UARCs have a history of defense research work that informs the definition of their core competencies as UARCs. For instance, the most recently established UARC at the University of Alaska was performing nuclear detection research before being organized as a UARC and now performs nuclear detection research under its UARC contract.

[^9]: The first cohort of UARCs also includes those affiliated with Georgia Institute of Technology, The Pennsylvania State University, University of Texas at Austin, University of Washington, and Utah State University found in Table 2.

*Table 2 is available in the published version.*

Sponsors of UARCs—primarily the Army and Navy—provide oversight, determine the set of core competencies and allocate the funding that UARCs receive. Oversight functions include the DOD sponsor's right to restrict the UARC from competing for other sources of research funding. All UARCs are restricted from competing against industry contractors directly (i.e. UARCs cannot bid on contracts being solicited by the DOD through open competition), but sponsors determine whether and how much the UARC can compete for other sources of federal research funding where industry competition is absent (Department of Defense, 2010, p. 3).

### 3.3 Structural similarities

FFRDCs and UARCs vary both across and within their respective categories, however, there are shared characteristics central to their functions. Those characteristics include the length of the agreement, the use of sole-source contracting once the research center is established, a pre-defined set of research areas determined by the sponsor and restrictions on how the research center can compete for other sources of funding. One of the few substantive differences between FFRDCs and UARCs is that UARCs are agreements with universities exclusively. The extensive similarities between FFRDCs and UARCs illustrate that these two research center designations are close substitutes.

#### 3.3.1 Length of the agreement

FFRDCs and UARCs alike are established on a long-term basis using a contract that defines the agreement, a plan for funding and the areas of research focus (Department of Defense, 2013). The establishing agreements are between the sponsor within the DOD and the organization with which the research center is being established. The contract will then be used to allocate funding for specific projects that fall under the mission of the research center. These contracts typically have the option for renewal that is exercised in many cases. For example, since its inception as a UARC in 1996, the Georgia Tech Research Institute, has continually had its contract renewed every five years. Other research centers such as the FFRDCs administered by the RAND corporation have been in operation since the late 1940s. However, throughout the history of using these research centers there have been many FFRDCs that were decertified. Some former FFRDCs, such as the Johns Hopkins University Applied Physics Laboratory, were decertified at one point while continuing the relationship with the DOD sponsor under different agreements before eventually being reorganized under a UARC contract.

#### 3.3.2 Sole-source contracting

The research centers that the DOD establishes are created with the purpose of providing research services that the DOD could not otherwise obtain (Department of Defense, 2013; Department of Defense, 1994). Because the research center is viewed as the only source for specific research services, they are eligible to receive sole-source funding. Sole-source funding does not need to be solicited on a competitive basis and instead can be allocated directly to the research center. FFRDCs, for instance, can be awarded funding under their organizing contract. The DOD is legally justified in allocating the funding to the FFRDC alone provided that the project is related to the research center's expertise. Similarly, once a UARC is established, the DOD has the right to allocate sole-source funding for research purposes (Department of Defense, 2010, p. 2). The UARC contract itself justifies the UARC as being a sole source for essential capabilities under existing federal law.

#### 3.3.3 Pre-defined set of research areas

FFRDCs are organized to advance defense research in specific areas. The stated purpose of this strategy is to identify areas for which the DOD cannot meet its goals through either internal laboratories or other contracting means (Department of Defense, 1994). The ten DOD FFRDCs that continue to exist today cover areas of research including artificial intelligence (e.g. Lincoln Laboratory), satellite technology (e.g. Aerospace), military strategy and logistics (e.g. Arroyo) and cybersecurity (e.g. Software Engineering Institute) to name a few. FFRDCs also fall into one of three categories related to their research areas. First, there are Research and Development Laboratories. The DOD currently has three FFRDCs that fall into this category. The goal of these research centers include filling in gaps in technological capabilities for the sponsor as well as the development of technology that is eventually transferred to private sector contractors for final development and production.[^10] The second type of FFRDCs are the Study and Analyses Centers. In contrast to the R&D labs these FFRDCs are tasked with research concerning policy and strategy relevant to a sponsor's needs. Five of the DOD's ten active FFRDCs fall under this category. Administrators of these FFRDCs include organizations such as the RAND corporation and the Institute for Defense Analyses, both nonprofit organizations. The third type of FFRDC are Systems Engineering and Integration Centers. The primary objectives of these research centers include creating new systems (e.g. acquisition systems) all the way through to the testing and implementation of those systems.

[^10]: See the NSF master list of FFRDCs for full definitions of all FFRDC types, [https://www.nsf.gov/statistics/ffrdclist/#def](https://www.nsf.gov/statistics/ffrdclist/#def)

UARCs are like FFRDCs in that their sponsors define a set of research areas often referred to as the core competencies (Department of Defense, 2010). UARCs are most closely related to the FFRDC R&D laboratories. The core competencies are made up of several topic areas under which projects at various stages of R&D are organized within a UARC. For instance, the UARC associated with the Georgia Institute of Technology is tasked with a list of fourteen core competencies that include research into missile sensors, radar and hardware design for missile systems among others (Department of Defense, 2013, p. 17). Research that is awarded under the UARC agreement must be in line with the center's core competencies as this allows the DOD sponsor to allocate funding on a sole-source basis. Most UARCs' core competencies are related to engineering relevant to military applications.

#### 3.3.4 Restrictions on outside funding

Although FFRDCs and UARCs are recipients of sole-source funding they are also subject to restrictions with respect to other funding opportunities. FFRDCs are prohibited by federal law from competing with other contractors on requests for proposals (Department of Defense, 1994). Under these restrictions, if an agency solicits a request for proposal that is open to any contractor, the FFRDC itself may not submit a bid. UARCs are not prohibited by federal law from doing this but do face similar restrictions to FFRDCs as outlined in the UARC management guide that governs all DOD UARCs (Department of Defense, 2010). The restrictions on UARCs cover competing for contracts that are solicited under full competition to other contractors. If the DOD solicits a contract for basic research that any other defense contractor is allowed to bid on, UARCs are unable to attempt to win that contract. Restrictions on outside funding from sources other than the federal government vary across UARCs according to standards determined by the sponsor. These restrictions, however, do not imply that either FFRDCs or UARCs cannot seek funding from other sources outside the government or that agencies within the government that do not directly sponsor the research center cannot use it for their purposes. The only requirement is that the work fall within the scope of the research center.

## 4. Evasive entrepreneurship in the DOD

### 4.1 DOD interest in contracted research centers

The DOD has long had an interest in establishing long-term research relationships with universities and other nonprofit organizations as shown by the use of FFRDCs in the decades after Second World War. Although most R&D funding allocated to contractors by the DOD in recent years is awarded to for-profit firms, the DOD has used its research centers and other contracts with universities to fund most of its early-stage research. Figure 1 below shows the percentage of obligations for DOD basic research that are allocated to FFRDCs and universities.

One of the goals of the DOD is to make advancements in military technology. To achieve this goal the DOD needs a supply of scientists to perform early-stage R&D relevant to upstream military goals (Kistiakowsky, 1989; Geiger, 1992). Some early-stage R&D can and is performed by for-profit contractors but there tends to be a gap in what can be performed by those contractors and what can be performed in-house (e.g. in Navy laboratories), creating the need for another source of outside researchers (Dale and Moy, 2000). The DOD also faces difficulties in maintaining high level research talent internally. Federal employee wages are largely out of the control of the DOD and therefore cannot be used as a tool to bid away researchers from other opportunities such as those in universities (Department of Defense, 1994). Furthermore, there is no market for military technology outside the DOD's demand which limits the supply of researchers with the necessary skills to perform specialized defense R&D (Mowery, 2012).

Given the interest in outside research centers such as FFRDCs, we should expect that bureaucrats in this context will act to increase the number of research centers under its control. The ability to increase the number of research centers depends on budgetary restrictions or regulations imposed by legislators on the use of FFRDCs. Absent any explicit restrictions on the use of research centers, there will be an expansion of their use. The interests of government actors are not uniform, making it possible that the DOD's use of research centers goes against the interests of legislators. When that occurs, legislators can act to impose restrictions on the use of FFRDCs as is the case for any bureaucratic activity (Hammond and Knott, 1996).

**Figure 1: Percentage of total DOD Basic R&D spending allocated to universities and FFRDCs, 1999–2019.** *Figure available in the published version.*

### 4.2 FFRDCs 1956–1983

Over the course of the second half of the twentieth century there is a shift in the costs of using FFRDCs for the DOD that ultimately results in the creation of UARCs. The first period to be examined begins in the years following Second World War and ends in 1983. In the years immediately following the war, there were little to no explicit restrictions on the use of FFRDCs making the cost of their use to DOD bureaucrats relatively low until budget ceilings were imposed leading to a decline in the number of DOD FFRDCs. The second period to be examined is from 1983 to the present day. During this time FFRDCs were formally regulated, increasing the cost of FFRDC use specifically for the DOD. FFRDCs declined when budget ceilings were introduced. UARCs did not emerge until FFRDCs were formally regulated and institutional contradictions arose allowing DOD bureaucrats to evade the new regulations.

#### 4.2.1 Expansion of DOD FFRDCs

In 1956, the first year FFRDCs were accounted for by the National Science Foundation, there were 27 DOD FFRDCs. By 1961, the number of DOD FFRDCs reached a peak of 43 (U.S. Congress, 1995, p. 51). The expansion of FFRDCs during this time was caused by two factors. First, after Second World War, once the DOD was formally established it had an interest in maintaining the relationships with universities that it had created during the war and in creating new relationships with organizations that could provide policy advice and research services to the department (Dale and Moy, 2000). For example, the wartime Radiation laboratory at MIT was reorganized as an FFRDC named the Lincoln Laboratory which in its early days focused on evaluating air defense systems (Geiger, 1993; Dale and Moy, 2000). On the nonprofit side, RAND formally broke off from Douglas Aircraft and was established as the RAND Corporation. The RAND corporation received contracts to manage new FFRDCs focusing on the policy side of research that are still in operation today. Second, there were few restrictions on the establishment or use of FFRDCs at the time. The research centers that became known as FFRDCs were initially research centers established using long term contracts solicited and awarded by components within the DOD such as the Army and Navy (U.S. Congress, 1995). Other than the rules governing contracting practices in general, the DOD had the discretion to design the agreements with research centers to best fit their needs. Through the combination of high demand and low administrative costs associated with using research centers, the DOD increased the number of research centers over a short period of time. As these relationships expanded and were formed with organizations other than universities, though, they would begin to attract the attention of legislators.

#### 4.2.2 Decline in the number of DOD FFRDCs

The first political restrictions imposed on the use of FFRDCs took the form of spending ceilings starting in 1964 and continuing through the late 1970s (Dale and Moy, 2000). The impetus for the ceilings on FFRDCs was in part due to defense contractors voicing concerns to legislators about FFRDCs taking business away from them and promoting unfair competition (Dale and Moy, 2000). Before RAND was incorporated as an independent nonprofit organization it was a nonprofit division of Douglas Aircraft, one of the larger defense contractors at the time. RAND's role in policy strategy and other inputs into defense acquisition in addition to its connection to Douglas Aircraft meant that the contractor plausibly had an edge over the competition. These and other concerns ultimately led to the imposition of spending ceilings on FFRDCs (Dale and Moy, 2000). Spending ceilings directly constrain the DOD's ability to use and establish FFRDCs. As a result, there was a steady decline in the number of FFRDCs over the next fourteen years. By 1978 there were only six DOD FFRDCs remaining. While the number of official DOD FFRDCs declined, the funding that would have gone to FFRDCs was substituted into separate contracts to the research centers now acting as contractors absent a long-term arrangement. The DOD therefore lost many of the desirable features that came along with FFRDC status. The number of DOD FFRDCs remained at its low of six until 1984.

The rise and fall in the number of DOD FFRDCs as shown in Figure 2 illustrates the first two implications of the theory. Absent political restrictions, the number of DOD FFRDCs is increasing as bureaucrats face low costs for their use. Once the budget for FFRDCs is restricted, the DOD is constrained and forced to reduce the number of FFRDCs under its management. The number of FFRDCs does begin to decline prior to 1964 but this is likely due to anticipation of budget ceilings by the DOD. Discussions in Congress of imposing restrictions on FFRDCs began as early as 1958 (Dale and Moy, 2000). Furthermore, the other federal agencies are not facing the same restrictions as the DOD. Shortly after the spending ceilings are imposed, FFRDCs managed by agencies such as the Department of Energy begin to rapidly increase in number. The number of these centers does eventually decline, but not to the extent that the DOD FFRDCs do. During the period of spending ceilings on DOD FFRDCs, alternative arrangements such as UARCs do not arise because there are not institutional contradictions for DOD bureaucrats to exploit.

**Figure 2: Number of DOD FFRDCs and other agency FFRDCs (e.g. Department of Energy), 1956–2021.** *Figure available in the published version.*

### 4.3 DOD FFRDCs 1983–2021

#### 4.3.1 Regulating FFRDCs and the creation of UARCs

FFRDCs began to be formalized in regulations starting with the Competition in Contracting Act (CICA) of 1983 (Dale and Moy, 2000, p. 15). This was the first step in creating the constraints on FFRDCs at the federal level that would ultimately be used to specifically regulate the DOD's use of the research centers. Provisions in the CICA included a formal, universal definition of FFRDCs in federal law. In addition to defining FFRDCs, the legislation also outlined procedures for the establishment and use of FFRDCs going forward. The provisions in the CICA were eventually included in the FAR in 1990 solidifying their effect on the DOD's use of FFRDCs. While the definition and many of the regulations on the use of FFRDCs applied generally to any federal department using FFRDCs, there were additional provisions specific to the DOD. The additional provisions included mandatory Congressional approval and a waiting period for any new DOD FFRDCs (FAR 35.017-7). The new FAR regulations increased the administrative burden for the DOD to use FFRDCs beyond the effect that spending restrictions had. It was at this point that the cost of using FFRDCs had risen such that the DOD would have the incentive to create the UARC designation to preserve the desirable features of FFRDCs and avoid the restrictions associated with their use.

By 1996, the DOD begins establishing UARCs. UARCs maintain most of the desirable features of FFRDCs namely the long-term nature of the agreements, the breadth of research, the control of research topics and the absence of perceived conflicts of interest. UARCs are similar enough to FFRDCs that many research centers that were once operated as FFRDCs with the DOD were reorganized as UARCs. These UARCs include those administered by Johns Hopkins University, Pennsylvania State University, University of Nebraska and University of Washington. The DOD would have to use existing federal regulations to justify the new designation or face the possibility of further regulation from Congress. The U.S. federal code allows for sole-source funding to be allocated to universities for research purposes under certain conditions. These conditions include the establishment or maintenance of essential engineering, research, or development capability.[^11] It is through this law that the DOD justified its creation of UARCs.

[^11]: Relevant law is 10 U.S.C. 2304.

Absent any viable substitutes for FFRDCs, when their use was further limited by the restrictions added to the FAR in 1990, the DOD had a strong incentive to create a new designation to continue expanding its scope and exploit the loophole new regulations presented. If the DOD decided to reorganize all its FFRDCs as UARCs with no justification other than the name change it is likely that Congress would retaliate with updated regulations. Because of this consideration it was necessary that the UARC designation be grounded in existing federal law that would justify their use and reduce the probability of more regulation. UARCs are established only within universities and organized under a set of core competencies determined to be unfulfilled by other contractors or internal researchers such that the sole-source use of these research centers is justified, by definition.

#### 4.3.2 UARCs limited to universities

The benefit of UARCs to the DOD is that they avoid the costly regulations imposed on FFRDCs by exploiting a contradiction in the regulations governing the use of research centers. It is therefore in the interest of bureaucrats to structure the UARC designation such that it limits the possibility of also being explicitly regulated in response to the evasion. The existing federal regulation that the DOD relies on to justify its use of UARCs does permit nonprofit organizations other than universities to receive sole-source funding under the same conditions as universities making it unclear why the new research centers are limited to universities alone. It is possible that universities relative to other nonprofits have a stronger background in performing military research. That possibility can be supported by the fact that four out of the six universities awarded UARC contracts in 1996 were at one point FFRDCs.

Relying on universities for the new research centers solves two other issues as well. First it would weaken the case of the private interests that the research centers were encroaching on competition in defense contracting, one of the early charges against the DOD's use of FFRDCs. Because the universities do not compete with defense contractors for more downstream contracts such as the production and delivery of new weapons or aircraft, their involvement in the research end of military procurement would be of little threat to defense contractor profits. Second, universities being nonprofits exclusively (no relation to a for profit organization) would provide a stronger justification for the claim that research centers were devoid of conflicts of interest. Since their start 25 years ago, there has yet to be a successful attempt to impose UARC specific regulations.

#### 4.3.3 UARCs surpass FFRDCs

The creation of UARCs by the DOD evaded the costly regulations on FFRDCs allowing the DOD to continue allocating funding to long-term research centers of its choosing. That the UARCs became the lower cost option is evident in both the number of UARCs established in the years following their inception and the level of funding allocated to UARCs in recent years when compared to DOD FFRDCs. Figure 3 shows that over time UARCs have come to outnumber DOD FFRDCs. Given that UARCs outnumber FFRDCs for the DOD it should also be expected that the funding for UARCs will exceed that of the DOD FFRDCs. Complete data on funding allocated to UARCs since their inception is not available. However, total obligations to UARCs from 2008 to 2020 are estimated using data on DOD R&D contracts.[^12] The National Science Foundation maintains more complete data on funding for FFRDCs, facilitating a comparison between the two. Figure 4 shows total obligations to the DOD's UARCs and FFRDCs respectively from 2008 to 2019. UARCs do not only outnumber DOD FFRDCs but in recent years are more well-funded.

[^12]: Contract data are obtained from usaspending.gov. All transactions for R&D product or service codes awarded to universities that have UARCs are counted as UARC obligations. The exception to this is MIT which has both a UARC and a FFRDC. The contract transactions with information showing FFRDC affiliation for MIT obligations are removed from the calculations.

**Figure 3: Number of DOD FFRDCs and UARCs, 1956–2021.** *Figure available in the published version.*

**Figure 4: Total DOD R&D obligations (millions of constant 2012 dollars) to DOD managed UARCs and FFRDCs, 2008–2020.** *Figure available in the published version.*

## 5. Conclusion

The analysis in this paper has four main implications. First, evasive entrepreneurship among bureaucrats is a necessary component to understanding the limitations of legislative control over the bureaucracy. Large, complex sets of regulations intended to control bureaucrats in areas such as acquisition create institutional contradictions that will be exploited by bureaucrats in the pursuit of their ends. As bureaucrats have more discretion, and as institutional contradictions arise, we should expect bureaucrats to have stronger incentives to act as evasive entrepreneurs. The creation of UARCs in response to FFRDC regulation illustrates how and when bureaucrats will evade legislative attempts at regulation. In contrast, an area such as budgets where bureaucrats have limited discretion and institutional contradictions are less likely, bureaucrats will not have the opportunity to act as evasive entrepreneurs.

The second implication is related to the DOD's use of UARCs over the last 25 years. As discussed, the original DOD research centers that became FFRDCs largely grew out of wartime research arrangements with universities. When the number of FFRDCs was declining through the 1960s and 1970s, many of those arrangements with universities were terminated. The emergence of UARCs in 1996 represents a shift back to universities playing a more significant role in defense research through long-term arrangements. With this change, there is a cause for concern over the influence that the DOD has on university research as was the case in the years following the Second World War and during the Cold War (Abrams, 1989; Oreskes, 2021). Defense research is more likely to be classified for national security reasons than other federally funded research and therefore more likely to conflict with the ideals of open scientific inquiry within universities.

Third, bureaucratic evasive entrepreneurship as developed here can be found in instances that go beyond the specific case detailed in this paper. Many other instances of bureaucratic evasive entrepreneurship will almost surely be the result of changes imposed by legislators as discussed in the theory and empirical example. However, this should not be taken to imply that new institutional contradictions are necessary for evasive entrepreneurial action. Bureaucrats acting entrepreneurially can be alert to pre-existing institutional contradictions that allow for evasion. Future research is needed to uncover examples such as this. For instance, actions of the public health bureaucracy during the COVID-19 pandemic are one area where regulations and political incentives likely led to instances of evasive entrepreneurship in need of further analysis. Pre-existing sets of overlapping laws and regulations that govern public health are a source of institutional contradictions that bureaucrats would have stronger incentives to exploit in the wake of a crisis like the pandemic, as the potential for benefits of evasion rise. I can only speculate what those specific contradictions were and how evasive entrepreneurial action manifested, but there are opportunities in this area and others for researchers to better understand the scope and variation in bureaucratic evasive entrepreneurialism using the framework in this paper.

Lastly, there are further opportunities for researchers to better understand the constraints on evasive entrepreneurship among bureaucrats. As discussed in this paper, it should be expected that although institutional contradictions will be common, they will vary depending on the types of restrictions implemented and the complexity of existing rules. This suggests that in areas with high degrees of complexity (e.g. multiple sources of governing regulations), institutional contradictions will be more numerous and therefore evasive entrepreneurship more likely, holding all else constant. Using this relationship as a guidepost, researchers should be able to identify bureaucracies where evasive entrepreneurship is more common and those where it is less common to further test this hypothesis. Constraints on evasive entrepreneurship can also arise depending on the dimension along which institutional contradictions occur. Bylund and McCaffrey (2017, p. 464) argue that institutional contradictions can occur horizontally (i.e. within the same institutional level) and vertically (i.e. across institutions at different levels). The levels of institutions refer to a hierarchy of institutions running from the area of market interaction to the level of norms and culture. Bylund and McCaffrey's (2017) framework would be a useful way to elaborate further on the kinds of institutional contradictions that do or do not foster bureaucratic evasive entrepreneurship.

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