Cyclical Persistence and the Cyclicality of R&D

We propose cyclical persistence as an important factor in‡uencing the timing of innovation. Schumpeter (1939) argues innovation should be concentrated during recessions when its marginal opportunity cost as forgone output is low. We propose the timing of innovation should be a¤ected additionally by innovation’s marginal expected return. A simple theory is presented, showing higher persistence raises the cyclical response in innovation’s marginal expected return, makes the dominance of innovation’s marginal opportunity cost more di¢ cult, and therefore drives R&D pro-cyclical. We carry the theory to an industry panel of R&D and output. Our estimation results suggest persistence helps to account for the observed cross-industry di¤erences in R&D’s