On the Link between Growth and Uncertainty: Uncertain Technological Change

How does risk or uncertainty in the productivity of human cap-ital affect the growth rate of the economy? To answer this ques-tion, a model of endogenous technological change is used where sus-tained growth stems from intentional investments in R&D from proÞt-maximizing Þrms. The uncertainty arises from the productivity of these investments in R&D. It is shown that, given the restriction that the elasticity of marginal utility is bounded above (by some speciÞed critical value), constant or decreasing returns to R&D implies a nega-tive effect of uncertainty on the average long-run growth rate. If the elasticity of marginal utility is above the critical value, the relationship between growth and uncertainty is ambiguous. Furthermore, if there are increasing returns to R&D, the model may have two equilibria, one with a low research level and one with a high research level. The effect of uncertainty, then, depends on which equilibrium the economy is situated