Innovation, 'Bank' Monitoring and Endogenous Financial Development

Angel de La Fuente () and Jose Marin ()

No 1276, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper analyses the interaction between capital accumulation, technological progress and financial development. Growth is sustained by the development of new varieties of intermediate goods. Innovation is risky and the probability of success depends on entrepreneurs' actions, which can only be imperfectly observed by outsiders through the use of a costly monitoring technology. Financial intermediaries emerge to avoid the duplication of monitoring activities and negotiate incentive contracts with innovators. Monitoring intensity is determined endogenously as a function of factor prices and determines the risk premium required by risk-averse researchers. Natural forward and backward links arise between finance and innovation. By allowing for better risk sharing, closer monitoring yields a higher level of innovative activity in equilibrium and faster growth. Under plausible assumptions, the resulting changes in factor prices lower the relative cost of monitoring, leading to a further increase in the efficiency of the financial sector.

Keywords: Financial Development; Growth (search for similar items in EconPapers)
JEL-codes: G20 O16 O30 O40 (search for similar items in EconPapers)
Date: 1995-11
References: Add references at CitEc
Citations: View citations in EconPapers (10)

Downloads: (external link)
http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=1276 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Journal Article: Innovation, bank monitoring, and endogenous financial development (1996)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:1276

Ordering information: This working paper can be ordered from
http://www.cepr.org/ ... ers/dp.php?dpno=1276

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().