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Uncertainty and the Dynamics of R&D

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  • Nick Bloom

Abstract

Uncertainty varies strongly over time, rising by 50% to 100% in recessions and by up to 200% after major economic and political shocks. This paper shows that higher uncertainty reduces the responsiveness of R&D to changes in business conditions - a "caution-effect" - making it more persistent over time. Thus, uncertainty will play a critical role in shaping the dynamics of R&D through the business cycle, and its response to technology policy. I also show that if fi?rms are increasing their level of R&D then the effect of uncertainty will be negative, while if fi?rms are reducing R&D then the effect of uncertainty will be positive.

(This abstract was borrowed from another version of this item.)

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.97.2.250
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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 97 (2007)
Issue (Month): 2 (May)
Pages: 250-255

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Handle: RePEc:aea:aecrev:v:97:y:2007:i:2:p:250-255

Note: DOI: 10.1257/aer.97.2.250
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References

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  1. Nick Bloom & John Van Reenen & Stephen Bond, 2006. "Uncertainty and Investment Dynamics," NBER Working Papers 12383, National Bureau of Economic Research, Inc.
  2. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
  3. Nick Bloom, 2006. "The Impact of Uncertainty Shocks: Firm Level Estimation and a 9/11 Simulation," CEP Discussion Papers dp0718, Centre for Economic Performance, LSE.
  4. Andrew B. Abel & Janice C. Eberly, 1995. "Optimal Investment with Costly Reversibility," NBER Working Papers 5091, National Bureau of Economic Research, Inc.
  5. Nicholas Bloom, 2009. "The Impact of Uncertainty Shocks," Econometrica, Econometric Society, vol. 77(3), pages 623-685, 05.
  6. Schwert, G William, 1989. " Why Does Stock Market Volatility Change over Time?," Journal of Finance, American Finance Association, vol. 44(5), pages 1115-53, December.
  7. Nick Bloom & John Van Reenen, 2006. "Measuring and explaining management practices across firms and countries," LSE Research Online Documents on Economics 733, London School of Economics and Political Science, LSE Library.
  8. McDonald, Robert & Siegel, Daniel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, MIT Press, vol. 101(4), pages 707-27, November.
  9. Ben S. Bernanke, 1980. "Irreversibility, Uncertainty, and Cyclical Investment," NBER Working Papers 0502, National Bureau of Economic Research, Inc.
  10. Diego Comin & Mark Gertler, 2006. "Medium-Term Business Cycles," American Economic Review, American Economic Association, vol. 96(3), pages 523-551, June.
  11. Eduardo S. Schwartz, 2003. "Patents and R&D as Real Options," NBER Working Papers 10114, National Bureau of Economic Research, Inc.
  12. Giuseppe Bertola & Ricardo J. Caballero, 1991. "Irreversibility and Aggregate Investment," NBER Working Papers 3865, National Bureau of Economic Research, Inc.
  13. Russell W. Cooper & John C. Haltiwanger, 2006. "On the Nature of Capital Adjustment Costs," Review of Economic Studies, Oxford University Press, vol. 73(3), pages 611-633.
  14. Bloom, Nick & Griffith, Rachel & Van Reenen, John, 2002. "Do R&D tax credits work? Evidence from a panel of countries 1979-1997," Journal of Public Economics, Elsevier, vol. 85(1), pages 1-31, July.
  15. Gadi Barlevy, 2007. "On the Cyclicality of Research and Development," American Economic Review, American Economic Association, vol. 97(4), pages 1131-1164, September.
  16. Hassler, John A. A., 1996. "Variations in risk and fluctuations in demand: A theoretical model," Journal of Economic Dynamics and Control, Elsevier, vol. 20(6-7), pages 1115-1143.
  17. Topel, Robert H & Rosen, Sherwin, 1988. "Housing Investment in the United States," Journal of Political Economy, University of Chicago Press, vol. 96(4), pages 718-40, August.
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Citations

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Cited by:
  1. Grassi, Emanuele & Di Cintio, Marco, 2012. "Uncertainty, flexible labour relations and R&D expenditure," MPRA Paper 37646, University Library of Munich, Germany.
  2. Edward S. Knotek II & Shujaat Khan, 2011. "How do households respond to uncertainty shocks?," Economic Review, Federal Reserve Bank of Kansas City, issue Q II.
  3. Nikolaos Antonakakis & Johann Scharler, 2009. "Volatility, Information and Stock Market Crashes," Economics working papers 2009-18, Department of Economics, Johannes Kepler University Linz, Austria.
  4. MORIKAWA Masayuki, 2013. "What Type of Policy Uncertainty Matters for Business?," Discussion papers 13076, Research Institute of Economy, Trade and Industry (RIETI).
  5. Franck Paolucci, 2007. "Des contraintes aux contributions des investissements en R&D aux Etats-Unis," Documents de Travail de l'OFCE 2007-16, Observatoire Francais des Conjonctures Economiques (OFCE).
  6. Hall, Bronwyn H., 2009. "The financing of innovative firms," EIB Papers 8/2009, European Investment Bank, Economics Department.
  7. Francesco Giavazzi & Michael McMahon, 2008. "Policy Uncertainty and Precautionary Savings," NBER Working Papers 13911, National Bureau of Economic Research, Inc.
  8. Darcy, Jacques & Krämer-Eis, Helmut & Guellec, Dominique & Debande, Olivier, 2009. "Financing technology transfer," EIB Papers 10/2009, European Investment Bank, Economics Department.
  9. Bottazzi, Laura, 2009. "The role of venture capital in alleviating financial constraints of innovative firms," EIB Papers 9/2009, European Investment Bank, Economics Department.
  10. Goni, Edwin & Maloney, William F., 2014. "Why don't poor countries do R&D ?," Policy Research Working Paper Series 6811, The World Bank.
  11. Harhoff, Dietmar, 2009. "The role of patents and licenses in securing external finance for innovation," EIB Papers 11/2009, European Investment Bank, Economics Department.

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