Ambiguity Attitude, R&D Investments and Economic Growth

The process aimed at discovering new ideas is an economic activity whose returns are intrinsically uncertain. In this paper we extend the standard neo-Schumpeterian growth framework to investigate the role of strong uncertainty in the innovative process. In particular, we assume that, when deciding upon R&D efforts, investors hold `ambiguous beliefs' about the exact probability of arrival of the next vertical innovation, and face ambiguity via the α-MEU decision rule (Ghirardato et al. (2004)). Along the steady-state equilibrium, the higher the agents' ambiguity aversion (α), the lower the R&D efforts and, coeteris paribus, the overall economic performance. Consistent with cross-country empirical evidence, this causal mechanism suggests that, together with the profitability conditions of the economy, different `cultural' attitudes towards ambiguity may help explain the different R&D efforts observed across countries.