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Uncertainty and the Dynamics of R&D

Jan 2007
Working Paper
By  Nicholas Bloom
Uncertainty varies strongly overtime, 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 overtime. 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.