Working Paper: CEPR ID: DP10840
Authors: Semyon Malamud; Francesca Zucchi
Abstract: We study optimal liquidity management, innovation, and production decisions for a continuum of firms facing financing frictions and the threat of creative destruction. We show that liquidity constraints unambiguously lead firms to decrease their production rate but, surprisingly, may spur investment in innovation (R&D). Using the model, we characterize which firms substitute production for innovation when constrained and thus display a non-monotonic relation between cash reserves and R&D. We embed our single-firm dynamics in a Schumpeterian model of endogenous growth and demonstrate that financing frictions have an ambiguous effect on economic growth.
Keywords: cash management; creative destruction; endogenous growth; financial constraints; innovation
JEL Codes: D21; G31; G32; G35; L11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| liquidity constraints (E41) | decrease production rate (E23) |
| cash reserves (D14) | increase investment in innovation (O35) |
| liquidity constraints (E41) | increase investment in innovation (O35) |
| decrease production rate (E23) | increase investment in innovation (O35) |