Innovation and growth with financial, and other, frictions

Jonathan Chiu, Cesaire Meh and Randall Wright

No 688, Working Papers from Federal Reserve Bank of Minneapolis

Abstract: The generation and implementation of ideas, or knowledge, is crucial for economic performance. We study this process in a model of endogenous growth with frictions. Productivity increases with knowledge, which advances via innovation, and with the exchange of ideas from those who generate them to those best able to implement them (technology transfer). But frictions in this market, including search, bargaining, and commitment problems, impede exchange and thus slow growth. We characterize optimal policies to subsidize research and trade in ideas, given both knowledge and search externalities. We discuss the roles of liquidity and financial institutions, and show two ways in which intermediation can enhance efficiency and innovation. First, intermediation allows us to finance more transactions with fewer assets. Second, it ameliorates certain bargaining problems, by allowing entrepreneurs to undo otherwise sunk investments in liquidity. We also discuss some evidence, suggesting that technology transfer is a significant source of innovation and showing how it is affected by credit considerations.

Date: 2011
New Economics Papers: this item is included in nep-ban, nep-dge, nep-ent, nep-fdg and nep-ino
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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Related works:
Journal Article: INNOVATION AND GROWTH WITH FINANCIAL, AND OTHER, FRICTIONS (2017)
Working Paper: Innovation and growth with financial, and other, frictions (2015)
Working Paper: Innovation and growth with financial, and other, frictions (2013)
Working Paper: Innovation and Growth with Financial, and Other, Frictions (2011)
Working Paper: Innovation and Growth with Financial, and other, Frictions (2011)
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