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On the Timing of Innovation in Stochastic Schumpeterian Growth Models

  • Gadi Barlevy

Recent work has revived the Schumpeterian hypothesis that recessions facilitate innovation and growth. But a major source of productivity growth, research and development, is actually procyclical. This paper argues that while it is optimal to concentrate growth-enhancing activities in downturns, dynamic spillovers inherent to the R&D process lead private agents to concentrate too much of their R&D activity in booms, precisely when its social cost is highest. Thus, while previous literature has argued recessions promote growth and intertemporal substitution is a desirable consequence of fluctuations, in the case of R&D recessions discourage growth and intertemporal substitution proves to be a social liability.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10741.

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Date of creation: Sep 2004
Handle: RePEc:nbr:nberwo:10741
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