DP13964 Uncertainty-Induced Reallocations and Growth

Author(s): Ravi Bansal, Mariano Massimiliano Croce, Wenxi Liao, Samuel Rosen
Publication Date: August 2019
Date Revised: September 2019
Keyword(s): growth, reallocation, Uncertainty shocks
JEL(s): E3, E6, G18
Programme Areas: Financial Economics, Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13964

Focusing on both micro and aggregate U.S. data, we show the existence of a significant link between aggregate uncertainty and reallocation of resources away from R&D-intensive capital. This link is important because a decrease in the aggregate share of R&D-oriented capital forecasts lower medium-term growth. In a multi-sector production economy in which (i) growth is endogenously supported by risky R&D investments, and (ii) the representative agent is volatility-risk averse and has access to other safer technologies that do not support growth, uncertainty shocks have a first-order negative impact on medium-term growth and welfare.