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

60 Pages Posted: 22 Nov 2015 Last revised: 8 Jan 2016

See all articles by Julian Atanassov

Julian Atanassov

University of Nebraska

Brandon Julio

Lundquist College of Business, University of Oregon

Tiecheng Leng

Sun Yat-sen University

Date Written: November 20, 2015

Abstract

We examine the relationship between political uncertainty and R&D investment by exploiting the timing of U.S. gubernatorial elections as a source of plausibly 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 encourages firm-level R&D. Firms increase R&D investments by an average of 4.6% in election years relative to non-election years. The uncertainty effect is stronger in hotly contested elections, in politically sensitive and hard-to-innovate industries, and in firms subject to higher growth options and 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 and therefore the total effect of political uncertainty on the long-run growth of an economy is unclear.

Keywords: Political uncertainty; R&D; Growth options; Preemption

JEL Classification: G18, G38, O31, O32

Suggested Citation

Atanassov, Julian and Julio, Brandon and Leng, Tiecheng, The Bright Side of Political Uncertainty: The Case of R&D (November 20, 2015). Available at SSRN: https://ssrn.com/abstract=2693605 or http://dx.doi.org/10.2139/ssrn.2693605

Julian Atanassov

University of Nebraska ( email )

CBA
University of Nebraska, Lincoln
Lincoln, NE 68588
United States

Brandon Julio

Lundquist College of Business, University of Oregon ( email )

1280 University of Oregon
Eugene, OR 97403
United States

Tiecheng Leng (Contact Author)

Sun Yat-sen University ( email )

135 Xingang West Road
Guangzhou, 510275
China

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