Private investments in innovation remain at sub-optimal levels because of various types of market failure. Hence, government supports innovation activities of the private sectors to lower cost of private innovation by granting tax incentives or granting project based subsidies for R&D projects. Recently, governments increasingly aim at not only boosting but also influencing the direction of R&D investment. This project analyzes the efficacy of public procurement as a public policy to increase innovation. Government directly procure R&D output and public procurement can also have indirect effects on innovation. On the former, we study the optimal design of R&D procurement contracts in two of the largest procurement markets worldwide: the US and Europe. Our goal is to better understand how the market for innovative public procurement affects both firms' incentives to innovate and their innovative output. We then study the indirect effects of procurement on productivity. These may realize through various shocks to the firm including, among others, demand shocks that help firms overcome market frictions or procurement induced alterations in market structure that change firms’ incentives to innovate.