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Abstract:

cover
CEP Discussion Paper
Uncertainty and the Dynamics of R&D
Nick Bloom
May 2007
Paper No' CEPDP0792:
Full Paper (pdf)

JEL Classification: D92; D8; O3


Tags: r&d; uncertainty; real options

Uncertainty varies strongly over time, 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 over time. 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.