Financial Innovation and Endogenous Growth

Stelios Michalopoulos (), Luc Laeven () and Ross Levine ()

No 97, Economics Working Papers from Institute for Advanced Study, School of Social Science

Abstract: We model technological and ?nancial innovation as re?ecting the decisions of pro?t maximizing agents and explore the implications for economic growth. We start with a Schumpeterian growth model where entrepreneurs earn pro?ts by inventing better goods and ?nanciers arise to screen entrepreneurs. A novel feature of the model is that ?nanciers also engage in the costly, risky, and potentially pro?table process of innovation: Financiers can invent more e¤ective processes for screening entrepreneurs. Every screening process, however, becomes less e¤ective as technology advances. Consequently, technological inno- vation and economic growth stop unless ?nanciers continually innovate. The model also allows for rent-seeking ?nancial innovation, in which ?nanciers engage in privately pro?table but socially ine¢ cient innovation that slows growth. Empirical evidence is more consistent with this dynamic, synergistic model of ?nancial and technological innovation than with existing theories.

Keywords: Invention; Economic Growth; Corporate Finance; Technological Change; Entrepreneurship (search for similar items in EconPapers)
JEL-codes: G0 O31 O4 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-ent and nep-fdg
Date: 2011-05
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Related works:
Working Paper: Financial Innovation and Endogenous Growth (2010)
Working Paper: Financial Innovation and Endogenous Growth (2009)
Working Paper: Financial Innovation and Endogenous Growth (2009)
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