Schumpeterian Cycles with Procyclical R&D

Recent empirical work …nds that R&D expenditures are quite procyclical, even for …rms that are not credit-constrained during downturns. This has been taken as strong evidence against Schumpeterian-style theories of business cycles that emphasize the idea that downturns in production may be good times to allocate labor towards innovative activities. Here we argue that the procyclicality of R&D investment is, in fact, quite consistent with at least one of these theories. In our analysis, we emphasize three key features of R&D investment relative to other types of innovative activity: (1) it uses knowledge intensively, (2) it is a long-term investment with uncertain applications and (3) it su¤ers from diminishing returns over time. This paper has bene…tted from the comments of seminar participants at NYU, McGill and the ASSA meetings. Funding from the Social Sciences and Humanities Research Council of Canada and the Canadian Institute for Advanced Research is gratefully acknowledged. The usual disclaimer applies.