Innovation under financial restrictions

Cornelia Neff

No 129, Tübinger Diskussionsbeiträge from University of Tübingen, School of Business and Economics

Abstract: How do financial constraints influence innovative activities of firms? In a two-period model of price competition with differentiated products we first analyze the incentives to innovate when both firms are self-financed. We then assume that one of the firms is financially constrained and therefore has to apply for a bank loan. If Information is asymmetrically distributed between the bank and the firm, the optimal, incentive-compatible debt contract will lead to a reduction of the innovative efforts of the financially restricted firm. On the other side, the unleveraged rival will increase her innovative activities and might even become a monopolist in the second period of competition. If we finally assume that both firms are financially constrained and apply for a loan at their house bank, we can show that Innovation activities are further reduced and overall welfare will decline.

Keywords: competition; Innovation; financial contract; asymmetric Information (search for similar items in EconPapers)
JEL-codes: D82 G32 L13 O31 (search for similar items in EconPapers)
Date: 1998
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:tuedps:129

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