Financial Contracting, R&D and Growth

Dezsoe Szalay

No 1999-03, GK working paper series from Post Graduate Programme "Allocation on Financial Markets", University of Mannheim

Abstract: This paper investigates the role of financial constraints in R&D races of the type used in Schumpeterian growth theory. In a world of perfect capital markets these models predict that all innovations come from industry outsiders. In reality, however, we observe a pronounced persistence of some dominant firms. We show that this persistence can be explained by constraints on financial contracting. The paper highlights an indirect channel through which agency costs reduce growth: due to agency costs incumbents face little competition from outsiders. Therefore they can afford to innovate less often and to ''rest longer on their laurels'', thereby retarding growth.

Keywords: moral hazard; inside/outside finance; patent race; endogenous growth (search for similar items in EconPapers)
JEL-codes: D82 D92 O31 (search for similar items in EconPapers)
Pages: 28 pages
Date: 1998-10-01, Revised 1999-12-08
New Economics Papers: this item is included in nep-dev, nep-ind, nep-ino, nep-mic and nep-tid
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Working Paper: Financial Contracting, R&D and Growth (1999)
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