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Financial Intermediation in a Model of Growth Through Creative Destruction

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Author Info
Maria Fuensanta Morales (Universidad de Murcia)
Abstract

This paper presents an endogenous growth model in which the research activity is financed by intermediaries that are able to reduce the incidence of the researcher's moral hazard. Financial activity is growth promoting because it makes research productivity higher. It is found that a subsidy to the financial sector may have larger growth effects than a direct subsidy to research. Moreover, due to the presence of moral hazard, increasing the subsidy rate to R&D may reduce the economy's growth rate. I show that there exists a negative relation between the financing of innovation and the process of capital accumulation. Concerning welfare, the presence of two externalities of opposite sign steaming from financial activity may cause that the no-tax equilibrium provides an inefficient level of financial services. Thus, policies oriented to balance the effects of the two externalities will be welfare improving.

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Paper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 0914.

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Date of creation: 01 Aug 2000
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Handle: RePEc:ecm:wc2000:0914

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