Liquidity, Innovation, And Endogenous Growth

Semyon Malamud and Francesca Zucchi
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Semyon Malamud: Ecole Polytechnique Federale de Lausanne and Swiss Finance Institute
Francesca Zucchi: Ecole Polytechnique Federale de Lausanne and Swiss Finance Institute

No 15-41, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We study optimal liquidity management, innovation, and production decisions for a continuum of firms facing financing frictions and the threat of creative destruction. We show that liquidity constraints unambiguously lead firms to decrease their production rate but, surprisingly, may spur investment in innovation (R&D). Using the model, we characterize which firms substitute production for innovation when constrained and thus display a non-monotonic relation between cash reserves and R&D. We embed our single-firm dynamics in a Schumpeterian model of endogenous growth and demonstrate that financing frictions have an ambiguous effect on economic growth.

Keywords: Innovation; Cash management; Financial constraints; Endogenous growth; Creative destruction (search for similar items in EconPapers)
JEL-codes: D21 G31 G32 G35 L11 (search for similar items in EconPapers)
Pages: 60 pages
Date: 2015-08
New Economics Papers: this item is included in nep-bec, nep-cfn, nep-gro, nep-ino and nep-sbm
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