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Cyclical Persistence and the Cyclicality of R&D

  • Min Ouyang

    ()

    (Department of Economics, University of California-Irvine)

We propose cyclical persistence as an important factor influencing the timing of innovation. Schumpeter (1939) argues innovation should be concentrated during recessions when its marginal opportunity cost as forgone output is low. We propose the timing of innovation should be affected additionally by innovation's marginal expected return. A simple theory is presented, showing higher persistence raises the cyclical response in innovation's marginal expected return, makes the dominance of innovation's marginal opportunity cost more difficult, and therefore drives R&D pro-cyclical. We carry the theory to an industry panel of R&D and output. Our estimation results suggest persistence helps to account for the observed cross-industry differences in R&D's cyclicality.

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File URL: http://www.economics.uci.edu/files/docs/workingpapers/2010-11/ouyang-4.pdf
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Paper provided by University of California-Irvine, Department of Economics in its series Working Papers with number 101104.

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Length: 33 pages
Date of creation: Aug 2010
Date of revision: Mar 2011
Handle: RePEc:irv:wpaper:101104
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. Michelle Alexopoulos, 2010. "Read All About it!! What happens following a technology shock?," Working Papers tecipa-391, University of Toronto, Department of Economics.
  2. Susanto Basu & John Fernald & Miles Kimball, 2004. "Are Technology Improvements Contractionary?," NBER Working Papers 10592, National Bureau of Economic Research, Inc.
  3. Min Ouyang, 2010. "Virtue of Bad Times and Financial Market Frictions," Working Papers 101103, University of California-Irvine, Department of Economics.
  4. Aghion, P. & Askenazy, P. & Berman, N. & Cette, G. & Eymard, L., 2008. "Credit Constraints and the Cyclicality of R&D Investment: Evidence from France," Working papers 198, Banque de France.
  5. Patrick Francois & Huw Lloyd-Ellis, 2009. "Schumpeterian Business Cycles with Pro-Cyclical R&D," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 12(4), pages 567-591, October.
  6. Gadi Barlevy, 2004. "The Cost of Business Cycles Under Endogenous Growth," American Economic Review, American Economic Association, vol. 94(4), pages 964-990, September.
  7. 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.
  8. Gadi Barlevy, 2007. "On the Cyclicality of Research and Development," American Economic Review, American Economic Association, vol. 97(4), pages 1131-1164, September.
  9. 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.
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