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Innovation, Business Cycles, and the Climate Transition

Author

Listed:
  • Diego R. Känzig
  • Maximilian Konradt
  • Lixing Wang
  • Donghai Zhang

Abstract

We study how business cycle fluctuations shape the pace and direction of innovation. Non-green innovation is procyclical, while green innovation is countercyclical, both over the cycle and in response to economic shocks. We explain this divergence in a dynamic general equilibrium model with endogenous green and non-green innovation. Green patents derive more value from distant profits, making green innovation less sensitive to short-run fluctuations. Endogenous innovation costs reinforce this mechanism, making green and non-green innovation effective substitutes. Evidence from market-implied patent valuations and scientist earnings supports the mechanism. The model implies larger and greener effects of innovation subsidies during downturns.

Suggested Citation

  • Diego R. Känzig & Maximilian Konradt & Lixing Wang & Donghai Zhang, 2026. "Innovation, Business Cycles, and the Climate Transition," NBER Working Papers 35795, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:35795
    Note: EEE EFG ME
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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • Q55 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Technological Innovation
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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