What causes countercyclicality of industry--level productivity dispersion in the U.S.? Empirically, we construct an index of negative profit shocks and show that both productivity dispersion and R&D intensity dispersion enlarge at the onset of the shock and gradually dissipate. Theoretically, we build a duopolistic technology--ladder model in which heterogeneous R&D costs determine firms post--shock optimal behaviors and equilibrium technology gap. 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. We provide two empirical tests for this mechanism.
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