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Innovation and growth with financial, and other, frictions

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  • Jonathan Chiu
  • Cesaire Meh
  • Randall Wright

Abstract

The generation and implementation of ideas, or knowledge, is crucial for economic performance. We study this process in a model of endogenous growth with frictions. Productivity increases with knowledge, which advances via innovation, and with the exchange of ideas from those who generate them to those best able to implement them (technology transfer). But frictions in this market, including search, bargaining, and commitment problems, impede exchange and thus slow growth. We characterize optimal policies to subsidize research and trade in ideas, given both knowledge and search externalities. We discuss the roles of liquidity and financial institutions, and show two ways in which intermediation can enhance efficiency and innovation. First, intermediation allows us to finance more transactions with fewer assets. Second, it ameliorates certain bargaining problems, by allowing entrepreneurs to undo otherwise sunk investments in liquidity. We also discuss some evidence, suggesting that technology transfer is a significant source of innovation and showing how it is affected by credit considerations.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Minneapolis in its series Working Papers with number 688.

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Date of creation: 2011
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Handle: RePEc:fip:fedmwp:688

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  1. Philippe Aghion & Peter Howitt, 1997. "Endogenous Growth Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262011662, December.
  2. Jeremy Greenwood & Juan M. Sanchez & Cheng Wang, 2007. "Financing Development: The Role of Information Costs," Economie d'Avant Garde Research Reports 14, Economie d'Avant Garde.
  3. Aleksander Berentsen & Mariana Rojas Breu & Shouyong Shi, 2012. "Liquidity, Innovation and Growth," Working Papers tecipa-467, University of Toronto, Department of Economics.
  4. Hosios, Arthur J, 1990. "On the Efficiency of Matching and Related Models of Search and Unemployment," Review of Economic Studies, Wiley Blackwell, vol. 57(2), pages 279-98, April.
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  6. Jeremy Greenwood & Juan Sanchez & Cheng Wang, 2013. "Quantifying the Impact of Financial Development on Economic Development," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(1), pages 194-215, January.
  7. Esteban Rossi-Hansberg & Satyajit Chatterjee, 2007. "Spin-offs and the Market for Ideas," 2007 Meeting Papers 86, Society for Economic Dynamics.
  8. Guillaume Rocheteau & Christopher Waller, 2005. "Bargaining and the value of money," Working Paper 0501, Federal Reserve Bank of Cleveland.
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  10. Gertler, Mark & Kiyotaki, Nobuhiro, 2010. "Financial Intermediation and Credit Policy in Business Cycle Analysis," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 11, pages 547-599 Elsevier.
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Cited by:
  1. Berentsen, Aleksander & Rojas Breu, Mariana & Shi, Shouyong, 2012. "Liquidity, innovation and growth," Journal of Monetary Economics, Elsevier, vol. 59(8), pages 721-737.
  2. Ufuk Akcigit & Murat Alp Celik & Jeremy Greenwood, 2013. "Buy, Keep or Sell: Economic Growth and the Market for Ideas," NBER Working Papers 19763, National Bureau of Economic Research, Inc.
  3. Angela Cipollone & Paolo Giordani, 2012. "Animal Spirits and Entrepreneurial Innovation: Theory and Evidence," Working Papers CASMEF 1210, Dipartimento di Economia e Finanza, LUISS Guido Carli.
  4. Chu, Angus C. & Kan, Kamhon & Lai, Ching-Chong & Liao, Chih-Hsing, 2014. "Money, random matching and endogenous growth: A quantitative analysis," Journal of Economic Dynamics and Control, Elsevier, vol. 41(C), pages 173-187.

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