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Financial Innovation and Endogenous Growth

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  • Laeven, Luc
  • Levine, Ross
  • Michalopoulos, Stelios

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.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7465.

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Date of creation: Sep 2009
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Handle: RePEc:cpr:ceprdp:7465

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Keywords: Corporate Finance; Economic Growth; Entrepreneurship; Financial Institutions; Invention; Technological change;

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Citations

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Cited by:
  1. Tarishi Matsuoka & Katsuyuki Naito & Keigo Nishida, 2011. "The Politics of Financial Development and Capital Accumulation," KIER Working Papers 793, Kyoto University, Institute of Economic Research.
  2. Song. Fenghua & Thakor, Anjan, 2013. "Notes on financial system development and political intervention," Policy Research Working Paper Series 6350, The World Bank.
  3. Thorsten Beck & Tao Chen & Chen Lin & Frank M. Song, 2012. "Financial Innovation: The Bright and the Dark Sides," Working Papers 052012, Hong Kong Institute for Monetary Research.
  4. Joanna B³ach, 2011. "Financial Innovations and Their Role in the Modern Financial System – Identification and Systematization of the Problem," "e-Finanse", University of Information Technology and Management, Institute of Financial Research and Analysis, vol. 7(3), pages 13-26, November.
  5. Sun, Puyang & Sen, Somnath & Jin, Shujing, 2013. "Equity market liberalization, credit constraints and income inequality," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 7(12), pages 1-28.
  6. Arshad Ali Bhatti & M. Emranul Haque & Denise R. Osborn, 2013. "Is the Growth Effect of Financial Development Conditional on Technological Innovation?," Centre for Growth and Business Cycle Research Discussion Paper Series 188, Economics, The Univeristy of Manchester.
  7. Beck, T.H.L., 2011. "The Future of Banking," Open Access publications from Tilburg University urn:nbn:nl:ui:12-5046877, Tilburg University.
  8. Bos, Jaap W.B. & Kolari, James W. & van Lamoen, Ryan C.R., 2013. "Competition and innovation: Evidence from financial services," Journal of Banking & Finance, Elsevier, vol. 37(5), pages 1590-1601.
  9. Adrian Van Rixtel & Gabriele Gasperini, 2013. "Financial crises and bank funding: recent experience in the euro area," BIS Working Papers 406, Bank for International Settlements.
  10. Luc Laeven, 2011. "Banking Crises: A Review," Annual Review of Financial Economics, Annual Reviews, vol. 3(1), pages 17-40, December.

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