• Can Uncertainty Promote Innovation? 

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  • Abstract:  

This paper studies the relationship between uncertainty and firm innovation. I employ an instrumental variables strategy and find that uncertainty has a positive causal effect on R&D investment among U.S. publicly listed firms, in contrast to a negative effect on capital investment. I show using an illustrative model that the convexity of firm-level innovation or idea creation shapes firms’ responses to uncertainty, providing a mechanism consistent with the Oi–Hartman–Abel theory. I then develop and estimate a dynamic quantitative endogenous growth model to support this mechanism. Counterfactual analysis suggests that while uncertainty can weaken the cyclicality of innovation, it may also weaken the effectiveness of innovation support policies.