INNOVATION AND GROWTH WITH FINANCIAL, AND OTHER, FRICTIONS

Jonathan Chiu, Cesaire Meh and Randall Wright

International Economic Review, 2017, vol. 58, issue 1, 95-125

Abstract: The generation of ideas and their implementation are crucial for economic performance. We study this in a model of endogenous growth, where productivity increases with innovation and where the exchange of ideas (technology transfer) allows those with comparative advantage to implement them. Search, bargaining, and commitment frictions impede the idea market, however, reducing efficiency and growth. We characterize optimal policies involving subsidies to innovative and entrepreneurial activity, given both knowledge and search externalities. The role of liquidity is discussed. We show intermediation helps by financing more transactions with fewer assets and, more subtly, by ameliorating holdup problems. We also discuss some evidence.

Date: 2017
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https://doi.org/10.1111/iere.12210

Related works:
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)
Working Paper: Innovation and Growth with Financial, and other, Frictions (2011)
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