American Economic Review: Vol. 97 No. 4 (September 2007)
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On the Cyclicality of Research and Development
Barlevy, Gadi. 2007. "On the Cyclicality of Research and Development." American Economic Review, 97(4): 1131-1164.
Economists have recently argued recessions play a useful role in fostering growth. Yet a major source of growth, R&D, is procyclical. This paper argues one reason for procyclical R&D is a dynamic externality inherent in R&D that makes entrepreneurs short-sighted and concentrate their innovation in booms, even when it is optimal to concentrate it in recessions. Additional forces may imply that procyclical R&D is desirable, but equilibrium R&D is likely to be too procyclical, and macroeconomic shocks are likely to have overly persistent effects on output and make growth more costly than in the absence of such shocks.
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