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.
2007."On the Cyclicality of Research and Development."American Economic Review,
97(4): 1131-1164.DOI: 10.1257/aer.97.4.1131