Financing Constraints and a Firm's Decision and Ability to Innovate: Establishing Direct and Reverse Effects

Vassilis Hajivassiliou and Frédérique Savignac

Working papers from Banque de France

Abstract: The paper analyzes the existence and impact of financing constraints as a possibly serious obstacle to innovation by .rms. The econometric framework we employ in our study is the simultaneous bivariate probit with mutual endogeneity of direct indicators of financial constraints and innovation decisions by firms. A novel method for establishing coherency conditions is used. It allows us for the first time to estimate models hitherto classified as incoherent through the use of prior sign restrictions on model parameters. We are thus able to quantify the interaction between financing constraints and a firm's decision and ability to innovate without forcing the econometric models to be recursive. Hence, we obtain direct as well as reverse interaction effects, leading us to conclude that binding financing constraints discourage innovation and at the same time innovative firms are more likely to face binding financing constraints.

Keywords: DSGE model; Currency union; Heterogeneity; Matching frictions; Welfare. (search for similar items in EconPapers)
JEL-codes: C15 C51 C52 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2008
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (33)

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Related works:
Working Paper: Financing constraints and a firm's decision and ability to innovate: establishing direct and reverse effects (2007)
Working Paper: Financing Constraints and a Firm’s Decision and Ability to Innovate: Establishing Direct and Reverse Effects (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:202

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