Working Paper: CEPR ID: DP7465
Authors: Stelios Michalopoulos; Luc Laeven; Ross Levine
Abstract: We model technological and financial innovation as reflecting the decisions of profit maximizing agents and explore the implications for economic growth. We start with a Schumpeterian endogenous growth model where entrepreneurs earn monopoly profits by inventing better goods and financiers arise to screen entrepreneurs. A novel feature of the model is that financiers also engage in the costly, risky, and potentially profitable process of innovation: Financiers can invent more effective processes for screening entrepreneurs. Every existing screening process, however, becomes less effective as technology advances. Consequently, technological innovation and, thus, economic growth stop unless financiers continually innovate. Historical observations and empirical evidence are more consistent with this dynamic model of financial innovation and endogenous growth than with existing models of financial development and growth.
Keywords: Corporate Finance; Economic Growth; Entrepreneurship; Financial Institutions; Invention and Technological Change
JEL Codes: G0; O31; O4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Financial innovation (G29) | Technological innovation (O39) |
| Technological innovation (O39) | Economic growth (O00) |
| Financial innovation (G29) | Economic growth (O00) |
| Lack of financial innovation (G19) | Economic growth stagnation (O49) |
| Financial development (ratio of private credit to GDP) (O16) | Convergence to growth rate of technological frontier (O47) |