NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

On the Timing of Innovation in Stochastic Schumpeterian Growth Models

Gadi Barlevy

NBER Working Paper No. 10741
Issued in September 2004
NBER Program(s):   EFG   PR

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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