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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 L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 113(1), pages 1-45, February.
  2. 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.
  3. Abel, Andrew B & Eberly, Janice C, 1996. "Optimal Investment with Costly Reversibility," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 63(4), pages 581-93, October.
  4. Nicholas Bloom & John Van Reenen, 2007. "Measuring and Explaining Management Practices Across Firms and Countries," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 122(4), pages 1351-1408, November.
  5. Hassler, John A. A., 1996. "Variations in risk and fluctuations in demand: A theoretical model," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 20(6-7), pages 1115-1143.
  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, 2006. "Uncertainty and Investment Dynamics," CEP Discussion Papers, Centre for Economic Performance, LSE dp0739, Centre for Economic Performance, LSE.
  8. Nicholas Bloom, 2009. "The Impact of Uncertainty Shocks," Econometrica, Econometric Society, Econometric Society, vol. 77(3), pages 623-685, 05.
  9. Bertola, Guiseppe & Caballero, Ricardo J, 1994. "Irreversibility and Aggregate Investment," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 61(2), pages 223-46, April.
  10. Eduardo S. Schwartz, 2003. "Patents and R&D as Real Options," NBER Working Papers 10114, National Bureau of Economic Research, Inc.
  11. McDonald, Robert & Siegel, Daniel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 101(4), pages 707-27, November.
  12. Nick Bloom, 2006. "The impact of uncertainty shocks: firm level estimation and a 9/11 simulation," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 19867, London School of Economics and Political Science, LSE Library.
  13. Diego Comin & Mark Gertler, 2003. "Medium Term Business Cycles," NBER Working Papers 10003, National Bureau of Economic Research, Inc.
  14. Ben S. Bernanke, 1980. "Irreversibility, Uncertainty, and Cyclical Investment," NBER Working Papers 0502, National Bureau of Economic Research, Inc.
  15. Topel, Robert H & Rosen, Sherwin, 1988. "Housing Investment in the United States," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 96(4), pages 718-40, August.
  16. Gadi Barlevy, 2007. "On the Cyclicality of Research and Development," American Economic Review, American Economic Association, American Economic Association, vol. 97(4), pages 1131-1164, September.
  17. Nicholas Bloom & Rachel Griffith & John Van Reenen, 2007. "Do R&D Tax Credits Work? Evidence from a Panel of Countries 1979-1997," Discussion Papers, Stanford Institute for Economic Policy Research 07-020, Stanford Institute for Economic Policy Research.
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Cited by:
  1. Edwin Goñi & William F. Maloney, 2014. "Why don’t Poor Countries do R&D?," DOCUMENTOS CEDE, UNIVERSIDAD DE LOS ANDES-CEDE 011947, UNIVERSIDAD DE LOS ANDES-CEDE.
  2. Hall, Bronwyn H., 2009. "The financing of innovative firms," EIB Papers 8/2009, European Investment Bank, Economics Department.
  3. Harhoff, Dietmar, 2009. "The role of patents and licenses in securing external finance for innovation," EIB Papers 11/2009, European Investment Bank, Economics Department.
  4. Fabio Bacchini & Maria Elena Bontempi & Roberto Golinelli & Cecilia Jona-Lasinio, 2014. "ICT and Non-ICT investments: short and long run macro dynamics," Working Papers LuissLab, Dipartimento di Economia e Finanza, LUISS Guido Carli 14113, Dipartimento di Economia e Finanza, LUISS Guido Carli.
  5. Edward S. Knotek II & Shujaat Khan, 2011. "How do households respond to uncertainty shocks?," Economic Review, Federal Reserve Bank of Kansas City, Federal Reserve Bank of Kansas City, issue Q II.
  6. Grassi, Emanuele & Di Cintio, Marco, 2012. "Uncertainty, flexible labour relations and R&D expenditure," MPRA Paper 37646, University Library of Munich, Germany.
  7. Giavazzi, Francesco & McMahon, Michael, 2008. "Policy Uncertainty and Precautionary Savings," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6766, C.E.P.R. Discussion Papers.
  8. Nikolaos Antonakakis & Johann Scharler, 2009. "Volatility, Information and Stock Market Crashes," Economics working papers, Department of Economics, Johannes Kepler University Linz, Austria 2009-18, Department of Economics, Johannes Kepler University Linz, Austria.
  9. Ruge-Leiva, Diego-Ivan, 2014. "International R&D Spillovers and Unobserved Common Shocks," MPRA Paper 56718, University Library of Munich, Germany.
  10. Shahid Yusuf & Kaoru Nabeshima, 2009. "Growth through Innovation : An Industrial Strategy for Shanghai," World Bank Other Operational Studies 18613, The World Bank.
  11. Bottazzi, Laura, 2009. "The role of venture capital in alleviating financial constraints of innovative firms," EIB Papers 9/2009, European Investment Bank, Economics Department.
  12. Franck Paolucci, 2007. "Des contraintes aux contributions des investissements en R&D aux Etats-Unis," Documents de Travail de l'OFCE, Observatoire Francais des Conjonctures Economiques (OFCE) 2007-16, Observatoire Francais des Conjonctures Economiques (OFCE).
  13. MORIKAWA Masayuki, 2013. "What Type of Policy Uncertainty Matters for Business?," Discussion papers, Research Institute of Economy, Trade and Industry (RIETI) 13076, Research Institute of Economy, Trade and Industry (RIETI).
  14. Darcy, Jacques & Krämer-Eis, Helmut & Guellec, Dominique & Debande, Olivier, 2009. "Financing technology transfer," EIB Papers 10/2009, European Investment Bank, Economics Department.

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