Uncertainty-Induced Reallocations, Innovation, and Growth

73 Pages Posted: 18 Nov 2016 Last revised: 24 Feb 2021

See all articles by Ravi Bansal

Ravi Bansal

Duke University and NBER

Mariano (Max) Massimiliano Croce

Finance Department, Bocconi University; Centre for Economic Policy Research (CEPR)

Wenxi Liao

Fuqua School of Business, Duke University

Samuel Rosen

Temple University, Fox School of Business

Date Written: December 4, 2016

Abstract

Focusing on both micro and aggregate U.S. data, we document the existence of a significant link between aggregate uncertainty, capital markets valuations and reallocation of resources away from risky R&D-intensive capital. This link is important because a decrease in the aggregate share of R&D-oriented investments forecasts lower medium-term growth. We study a two-sector model in which one sector features relatively risky R&D-intensive capital essential to sustain growth, whereas the other sector features safer capital that is not innovation-intensive. Our model accounts for our novel empirical evidence obtained from both capital markets and aggregate data. We identify an important role for uncertainty shocks as they feature a first-order negative impact on medium-term growth and welfare.

Keywords: Uncertainty shocks, Reallocation, Growth

JEL Classification: E3; E6; G18

Suggested Citation

Bansal, Ravi and Croce, Mariano Massimiliano and Liao, Wenxi and Rosen, Samuel, Uncertainty-Induced Reallocations, Innovation, and Growth (December 4, 2016). Available at SSRN: https://ssrn.com/abstract=2872105 or http://dx.doi.org/10.2139/ssrn.2872105

Ravi Bansal

Duke University and NBER ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7758 (Phone)
919-660-8038 (Fax)

Mariano Massimiliano Croce (Contact Author)

Finance Department, Bocconi University ( email )

Via Sarfatti, 25
Milan, MI 20136
Italy

HOME PAGE: http://sites.google.com/view/mmcroce/home

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Wenxi Liao

Fuqua School of Business, Duke University ( email )

Durham, NC
United States

Samuel Rosen

Temple University, Fox School of Business ( email )

Fox School of Business and Management
Philadelphia, PA 19122
United States

HOME PAGE: http://sites.google.com/view/samuel-rosen/

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