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Uncertainty and the Dynamics of R&D

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  • Nicholas 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 firms are increasing their level of R&D then the effect of uncertainty will be negative, while if firms are reducing R&D then the effect of uncertainty will be positive.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12841.

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Date of creation: Jan 2007
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Publication status: published as Nick Bloom, 2007. "Uncertainty and the Dynamics of R&D," American Economic Review, American Economic Association, vol. 97(2), pages 250-255, May.
Handle: RePEc:nbr:nberwo:12841

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  1. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," NBER Working Papers 8403, National Bureau of Economic Research, Inc.
  2. 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.
  3. 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.
  4. 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.
  5. Nick Bloom & John Van Reenen, 2006. "Measuring and Explaining Management Practices Across Firms and Countries," CEP Discussion Papers dp0716, Centre for Economic Performance, LSE.
  6. G. William Schwert, 1990. "Why Does Stock Market Volatility Change Over Time?," NBER Working Papers 2798, National Bureau of Economic Research, Inc.
  7. Nick Bloom & Stephen Bond & John Van Reenen, 2007. "Uncertainty and Investment Dynamics," Review of Economic Studies, Oxford University Press, vol. 74(2), pages 391-415.
  8. Eduardo S. Schwartz, 2003. "Patents and R&D as Real Options," NBER Working Papers 10114, National Bureau of Economic Research, Inc.
  9. 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.
  10. Diego Comin & Mark Gertler, 2003. "Medium Term Business Cycles," NBER Working Papers 10003, National Bureau of Economic Research, Inc.
  11. Nicholas Bloom, 2007. "The Impact of Uncertainty Shocks," NBER Working Papers 13385, National Bureau of Economic Research, Inc.
  12. Bernanke, Ben S, 1983. "Irreversibility, Uncertainty, and Cyclical Investment," The Quarterly Journal of Economics, MIT Press, vol. 98(1), pages 85-106, February.
  13. Andrew B. Abel & Janice C. Eberly, 1995. "Optimal Investment with Costly Reversibility," NBER Working Papers 5091, National Bureau of Economic Research, Inc.
  14. 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.
  15. Bertola, Guiseppe & Caballero, Ricardo J, 1994. "Irreversibility and Aggregate Investment," Review of Economic Studies, Wiley Blackwell, vol. 61(2), pages 223-46, April.
  16. 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.
  17. Gadi Barlevy, 2007. "On the Cyclicality of Research and Development," American Economic Review, American Economic Association, vol. 97(4), pages 1131-1164, September.
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Cited by:
  1. Darcy, Jacques & Krämer-Eis, Helmut & Guellec, Dominique & Debande, Olivier, 2009. "Financing technology transfer," EIB Papers 10/2009, European Investment Bank, Economics Department.
  2. Bottazzi, Laura, 2009. "The role of venture capital in alleviating financial constraints of innovative firms," EIB Papers 9/2009, European Investment Bank, Economics Department.
  3. Nikolaos Antonakakis & Johann Scharler, 2012. "Volatility, Information And Stock Market Crashes," Journal of Advanced Studies in Finance, ASERS Publishing, vol. 0(1), pages 49-67, June.
  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. Diego-Ivan Ruge-Leiva, 2014. "International R&D spillovers and unobserved common shocks," Working Papers 08/14, Instituto Universitario de Análisis Económico y Social.
  7. Hall, Bronwyn H., 2009. "The financing of innovative firms," EIB Papers 8/2009, European Investment Bank, Economics Department.
  8. Grassi, Emanuele & Di Cintio, Marco, 2012. "Uncertainty, flexible labour relations and R&D expenditure," MPRA Paper 37646, University Library of Munich, Germany.
  9. Harhoff, Dietmar, 2009. "The role of patents and licenses in securing external finance for innovation," EIB Papers 11/2009, European Investment Bank, Economics Department.
  10. Giavazzi, Francesco & McMahon, Michael, 2008. "Policy Uncertainty and Precautionary Savings," CEPR Discussion Papers 6766, C.E.P.R. Discussion Papers.
  11. 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.
  12. Goni, Edwin & Maloney, William F., 2014. "Why don't poor countries do R&D ?," Policy Research Working Paper Series 6811, The World Bank.

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