The Bright Side of Political Uncertainty: The Case of R&D

Abstract

We use close gubernatorial elections as a quasi-natural experiment to document a positive effect of political uncertainty on firm-level R&D. This finding is in contrast to the existing literature documenting a negative impact of political uncertainty on capital investment. We examine potential mechanisms and find that our results are consistent with the growth option view of R&D investment. The effect is stronger for politicallysensitive and high-tech industries.The results are robust to different proxies for political uncertainty shocks. As predicted by models of investment under uncertainty, the real effects of political uncertainty depend critically on the type of the investment.

Keywords: Political uncertainty, R&D, Investment under uncertainty

JEL Classification: G18, G38, O31, O32