Ambiguity Attitude, R&D Investments and Economic Growth

The process aimed at discovering new ideas is an economic activity the returns from which are intrinsically uncertain. We extend the neo-Schumpeterian growth framework to investigate the role of strong uncertainty in the innovative process. In particular, we postulate that, when deciding upon R&D efforts, investors hold `ambiguous beliefs' about the exact probability of arrival of the next vertical innovation, and that they face ambiguity via the α-MEU decision rule (Ghirardato et al., 2004). Along the balanced growth path, the higher the agent's ambiguity aversion (α), the lower the R&D efforts and the 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.