Working Paper: NBER ID: w15356
Authors: Stelios Michalopoulos; Luc Laeven; Ross Levine
Abstract: Is financial innovation necessary for sustaining economic growth? To address this question, we build a Schumpeterian model in which entrepreneurs earn profits by inventing better goods and profit-maximizing financiers arise to screen entrepreneurs. The model has two novel features. First, financiers engage in the costly but potentially profitable process of innovation: they can invent better methods for screening entrepreneurs. Second, every screening process becomes less effective as technology advances. The model predicts that technological innovation and economic growth eventually stop unless financiers innovate. Empirical evidence is consistent with this dynamic, synergistic model of financial and technological innovation.
Keywords: financial innovation; economic growth; Schumpeterian model; technological innovation
JEL Codes: G00; G30; O31; O40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| technological innovation (O35) | financial innovation (O16) |
| financial innovation (O16) | technological innovation (O35) |
| financial innovation (O16) | identification of promising entrepreneurs (L26) |
| financial innovation (O16) | economic growth (O49) |
| financial innovation (O16) | speed of economic convergence (F62) |
| financial innovation (O16) | rate of economic growth (O49) |