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On the Cyclicality of Research and Development

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  • Gadi Barlevy

Abstract

Economists have recently argued recessions play a useful role in fostering growth. Yet a major source of growth, R&D, is procyclical. This paper argues one reason for procyclical R&D is a dynamic externality inherent in R&D that makes entrepreneurs short-sighted and concentrate their innovation in booms, even when it is optimal to concentrate it in recessions. Additional forces may imply that procyclical R&D is desirable, but equilibrium R&D is likely to be too procyclical, and macroeconomic shocks are likely to have overly persistent effects on output and make growth more costly than in the absence of such shocks.

Suggested Citation

  • Gadi Barlevy, 2007. "On the Cyclicality of Research and Development," American Economic Review, American Economic Association, vol. 97(4), pages 1131-1164, September.
  • Handle: RePEc:aea:aecrev:v:97:y:2007:i:4:p:1131-1164
    Note: DOI: 10.1257/aer.97.4.1131
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