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Virtue of Bad Times and Financial Market Frictions

  • Min Ouyang

    ()

    (Department of Economics, University of California-Irvine)

Schumpeter (1939) proposes that recessions have virtue in promoting growth-enhancing activities. However, this view is often at odds with data, as many innovative activities appear pro-cyclical. We revisit the "virtue of bad times" theoretically and empirically. Our theory suggests that recessions have such virtue only when the cyclicality of innovation's marginal opportunity cost dominates that of its marginal expected return; but binding financial constraints can hinder such virtue, preventing innovation from rising during recessions. Our theory is carried to an industry panel of production and innovation. Our evidence suggests that recessions indeed have potential virtue, but such virtue is hindered by financial-market frictions.

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File URL: http://www.economics.uci.edu/files/docs/workingpapers/2010-11/ouyang-3.pdf
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Paper provided by University of California-Irvine, Department of Economics in its series Working Papers with number 101103.

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Length: 34 pages
Date of creation: Aug 2010
Date of revision:
Handle: RePEc:irv:wpaper:101103
Contact details of provider: Postal: Irvine, CA 92697-3125
Phone: (949) 824-5788
Web page: http://www.economics.uci.edu/

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  1. Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002. "Unit root tests in panel data: asymptotic and finite-sample properties," Journal of Econometrics, Elsevier, vol. 108(1), pages 1-24, May.
  2. Philippe Aghion & George-Marios Angeletos & Abhijit Banerjee & Kalina Manova, 2005. "Volatility and Growth: Credit Constraints and Productivity-Enhancing Investment," NBER Working Papers 11349, National Bureau of Economic Research, Inc.
  3. Gadi Barlevy, 2007. "On the Cyclicality of Research and Development," American Economic Review, American Economic Association, vol. 97(4), pages 1131-1164, September.
  4. Diego Comin & Mark Gertler, 2006. "Medium-Term Business Cycles," American Economic Review, American Economic Association, vol. 96(3), pages 523-551, June.
  5. Philippe Aghion & Philippe Askenazy & Nicolas Berman & Gilbert Cette & Laurent Eymard, 2008. "Credit constraints and the cyclicality of R&D investment: Evidence from France," PSE Working Papers halshs-00586744, HAL.
  6. Min Ouyang, 2011. "On the Cyclicality of R&D," The Review of Economics and Statistics, MIT Press, vol. 93(2), pages 542-553, May.
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