A Schumpeterian Growth Model with Financial Intermediaries

Miho Sunaga ()
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Miho Sunaga: Graduate School of Economics, Osaka University

No 15-19, Discussion Papers in Economics and Business from Osaka University, Graduate School of Economics

Abstract: This study introduces financial intermediaries into the Schumpeterian growth model developed by Aghion, Howitt, and Mayer-Foulkes (2005). They collect deposits from households, provide funds for entrepreneurial projects, and monitor the entrepreneurs. I consider an economy with moral hazard problems: entrepreneurs can hide the result of a successful innovation and thereby avoid repaying financial intermediaries if the latter do not monitor entrepreneurial performance. I analyze the effects of financial interme- diaries f activities on technological progress and economic growth in such an economy. I show that financial intermediaries need to monitor entrepreneurs in an economy where the legal protection of creditors is not strong enough. Such monitoring can resolve the moral hazard problem; however, it does not always promote technological innovation, because it could increase the cost of entrepreneurial innovation and thus reduce the amount invested for innovation. I also examine how monitoring by financial intermedi- aries affects the welfare of individuals through the stringency of financial markets.

Keywords: Economic growth; Innovation; Financial intermediaries; Monitoring (search for similar items in EconPapers)
JEL-codes: G21 O16 O41 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2015-06
New Economics Papers: this item is included in nep-ban, nep-ent, nep-fdg and nep-gro
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Persistent link: https://EconPapers.repec.org/RePEc:osk:wpaper:1519

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