Uncertainty-induced Reallocations, Innovation and Growth

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Focusing on both micro and aggregate U.S. data, we document the existence of a significant link between aggregate uncertainty, capital market 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 three-sector model in which one sector features relatively risky R&D-intensive capital essential to sustain growth, whereas the other sectors feature safer capital that is not innovation-intensive. Our model accounts for our empirical evidence as uncertainty shocks prompt sectoral reallocations and feature a first-order negative impact on medium-term growth.