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Uncertainty and the Dynamics of R&D

  • Nick Bloom

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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File URL: http://cep.lse.ac.uk/pubs/download/dp0792.pdf
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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0792.

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Date of creation: May 2007
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Handle: RePEc:cep:cepdps:dp0792
Contact details of provider: Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP

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  1. Diego Comin & Mark Gertler, 2003. "Medium Term Business Cycles," NBER Working Papers 10003, National Bureau of Economic Research, Inc.
  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. John Hassler, . "Variations in Risk and Fluctuations in Demand - a theoretical model," Homapage Papers _003, Stockholm University, Institute for International Economic Studies.
  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, 2007. "The Impact of Uncertainty Shocks," NBER Working Papers 13385, National Bureau of Economic Research, Inc.
  6. Gadi Barlevy, 2007. "On the Cyclicality of Research and Development," American Economic Review, American Economic Association, vol. 97(4), pages 1131-1164, September.
  7. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, volume 1, number 5474, March.
  8. 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.
  9. Bertola, Guiseppe & Caballero, Ricardo J, 1994. "Irreversibility and Aggregate Investment," Review of Economic Studies, Wiley Blackwell, vol. 61(2), pages 223-46, April.
  10. John Van Reenen & Nick Bloom & Steve Bond, 2006. "Uncertainty and investment dynamics," LSE Research Online Documents on Economics 2645, London School of Economics and Political Science, LSE Library.
  11. Bloom, Nicholas & Van Reenen, John, 2006. "Measuring and Explaining Management Practices Across Firms and Countries," CEPR Discussion Papers 5581, C.E.P.R. Discussion Papers.
  12. 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, vol. 113(1), pages 1-45, February.
  13. 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.
  14. Eduardo S. Schwartz, 2003. "Patents and R&D as Real Options," NBER Working Papers 10114, National Bureau of Economic Research, Inc.
  15. Bernanke, Ben S, 1983. "Irreversibility, Uncertainty, and Cyclical Investment," The Quarterly Journal of Economics, MIT Press, vol. 98(1), pages 85-106, February.
  16. 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.
  17. 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.
  18. G. William Schwert, 1990. "Why Does Stock Market Volatility Change Over Time?," NBER Working Papers 2798, National Bureau of Economic Research, Inc.
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