R&D Heterogeneity and Countercyclical Productivity Dispersion

TL;DR

This paper develops a duopoly model to explain why industry productivity dispersion increases during downturns, showing that low-cost firms ramp up R&D while high-cost firms cut back, supported by empirical tests.

Contribution

It introduces a theoretical model linking R&D heterogeneity to countercyclical productivity dispersion and provides empirical evidence for this mechanism.

Findings

Low-cost firms increase R&D after negative shocks

High-cost firms reduce R&D following downturns

Productivity dispersion rises during recessions

Abstract

Why is the U.S. industry-level productivity dispersion countercyclical? Theoretically, we build a duopoly model in which heterogeneous R&D costs determine firms' optimal behaviors and the equilibrium technology gap after a negative profit shock. Quantitatively, we calibrate a parameterized model, simulate firms' post--shock responses and predict that productivity dispersion is due to the low-cost firm increasing R&D efforts and the high-cost firm doing the opposite. Empirically, we construct an index of negative profit shocks and provide two reduced-form tests for this mechanism.