The Bright Side of Political Uncertainty: The Case of R&D
52 Pages Posted: 21 Aug 2015 Last revised: 29 May 2019
Date Written: May 1, 2019
We examine the relationship between political uncertainty and R&D investment by exploiting the timing of U.S. gubernatorial elections as a source of exogenous variation in uncertainty. In contrast to the literature documenting negative effects of political uncertainty on real investment, we find that uncertainty over government policy stimulates firm-level R&D. Firms increase R&D investments by an average of 3.8% in election years relative to non-election years. The uncertainty effect is stronger in highly contested elections, in politically sensitive industries, and in firms facing greater product market competition. Our findings suggest that, as predicted by models of investment under uncertainty, the real effects of political uncertainty depend on the properties of the investment and the degree of product market competition.
Keywords: Political uncertainty, R&D, Investment under uncertainty
JEL Classification: G18, G38, O31, O32
Suggested Citation: Suggested Citation