Project Heterogeneity and Growth: The Impact of Selection
AbstractIn the classical literature of innovation-based endogenous growth, the main engine of long run economic growth is firm entry. Nevertheless, when projects are heterogeneous, and good ideas are scarce, a mass-composition trade off is introduced into this link: larger cohorts are characterized by a lower average quality. As one of the roles of the financial system is to screen the quality of projects, the ability of financial intermediaries to detect promising projects shapes the strength of this trade-off. In order to study this relationship, we build a general equilibrium endogenous growth model with project heterogeneity and financial screening. To illustrate the relevance of the mass and composition margins we apply this framework to two important debates in the growth literature. First, we show that corporate taxation has only a weak effect in growth, but a strong effect on firm entry, both well known empirical regularities. A second illustration studies the effects of financial development in growth. A word of caution arises: for economies that are characterized by high rates of firm creation, domestic credit should not be used as a proxy of financial development, in contrast to most of the empirical literature.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Penn Institute for Economic Research, Department of Economics, University of Pennsylvania in its series PIER Working Paper Archive with number 13-011.
Length: 45 pages
Date of creation: 05 Feb 2013
Date of revision:
Growth; Firm Entry; Project Heterogeneity; Financial Selection; Entrepreneurship; Financial Development;
Find related papers by JEL classification:
- O3 - Economic Development, Technological Change, and Growth - - Technological Change; Research and Development; Intellectual Property Rights
- O1 - Economic Development, Technological Change, and Growth - - Economic Development
- H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-03-02 (All new papers)
- NEP-DGE-2013-03-02 (Dynamic General Equilibrium)
- NEP-ENT-2013-03-02 (Entrepreneurship)
- NEP-PPM-2013-03-02 (Project, Program & Portfolio Management)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Hopenhayn, Hugo A, 1992. "Entry, Exit, and Firm Dynamics in Long Run Equilibrium," Econometrica, Econometric Society, vol. 60(5), pages 1127-50, September.
- Jeremy Greenwood & Boyan Jovanovic, 1989.
"Financial Development, Growth, and the Distribution of Income,"
NBER Working Papers
3189, National Bureau of Economic Research, Inc.
- Greenwood, Jeremy & Jovanovic, Boyan, 1990. "Financial Development, Growth, and the Distribution of Income," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 1076-1107, October.
- Greenwood, J. & Jovanovic, B., 1988. "Financial Development, Growth, And The Distribution Of Income," RCER Working Papers 131, University of Rochester - Center for Economic Research (RCER).
- Greenwood, J. & Jovanovic, B., 1990. "Financial Development, Growth, And The Distribution Of Income," University of Western Ontario, The Centre for the Study of International Economic Relations Working Papers 9002, University of Western Ontario, The Centre for the Study of International Economic Relations.
- Gonzalez, Laura & James, Christopher, 2007. "Banks and bubbles: How good are bankers at spotting winners?," Journal of Financial Economics, Elsevier, vol. 86(1), pages 40-70, October.
- Grossman, G.M. & Helpman, E., 1989.
"Quality Ledders In The Theory Of Growth,"
148, Princeton, Woodrow Wilson School - Public and International Affairs.
- Angelopoulos, Konstantinos & Economides, George & Kammas, Pantelis, 2007. "Tax-spending policies and economic growth: Theoretical predictions and evidence from the OECD," European Journal of Political Economy, Elsevier, vol. 23(4), pages 885-902, December.
- King, Robert G. & Levine, Ross, 1993.
"Finance and growth : Schumpeter might be right,"
Policy Research Working Paper Series
1083, The World Bank.
- Gian Luca Clementi & Dino Palazzo, 2010. "Entry, Exit, Firm Dynamics, and Aggregate Fluctuations," Working Paper Series 27_10, The Rimini Centre for Economic Analysis.
- Dobbelaere, Sabien & Mairesse, Jacques, 2005. "Cross-Sectional Heterogeneity in Price-Cost Margins and the Extent of Rent Sharing at the Sector and Firm Level in France," IZA Discussion Papers 1898, Institute for the Study of Labor (IZA).
- Dino Palazzo & Gian Luca Clementi, 2010. "Entry, Exit, Firm Dynamics, and Aggregate Fluctuations," 2010 Meeting Papers 1188, Society for Economic Dynamics.
- Tobias J. Moskowitz & Annette Vissing-Jorgensen, 2002. "The Returns to Entrepreneurial Investment: A Private Equity Premium Puzzle?," NBER Working Papers 8876, National Bureau of Economic Research, Inc.
- Benfratello, Luigi & Schiantarelli, Fabio & Sembenelli, Alessandro, 2008.
"Banks and innovation: Microeconometric evidence on Italian firms,"
Journal of Financial Economics,
Elsevier, vol. 90(2), pages 197-217, November.
- Luigi Benfratello & Fabio Schiantarelli & Alessandro Sembenelli, 2005. "Banks and Innovation: Microeconometric Evidence on Italian Firms," Boston College Working Papers in Economics 631, Boston College Department of Economics, revised 13 Jun 2007.
- Benfratello, Luigi & Schiantarelli, Fabio & Sembenelli, Alessandro, 2006. "Banks and Innovation: Microeconometric Evidence on Italian Firms," IZA Discussion Papers 2032, Institute for the Study of Labor (IZA).
- Norman Gemmell & Richard Kneller & Ismael Sanz, 2011. "The Timing and Persistence of Fiscal Policy Impacts on Growth: Evidence from OECD Countries," Economic Journal, Royal Economic Society, vol. 121(550), pages F33-F58, February.
- Da Rin, Marco & Di Giacomo, Marina & Sembenelli, Alessandro, 2011.
"Entrepreneurship, firm entry, and the taxation of corporate income: Evidence from Europe,"
Journal of Public Economics,
Elsevier, vol. 95(9-10), pages 1048-1066, October.
- Da Rin, Marco & Di Giacomo, Marina & Sembenelli, Alessandro, 2011. "Entrepreneurship, firm entry, and the taxation of corporate income: Evidence from Europe," Journal of Public Economics, Elsevier, vol. 95(9), pages 1048-1066.
- Da Rin, M. & Di Giacomo, M. & Sembenelli, A., 2010. "Entrepreneurship, Firm Entry, and the Taxation of Corporate Income: Evidence from Europe," Discussion Paper 2010-026, Tilburg University, Tilburg Law and Economic Center.
- William Easterly & Sergio Rebelo, 1993.
"Fiscal Policy and Economic Growth: An Empirical Investigation,"
NBER Working Papers
4499, National Bureau of Economic Research, Inc.
- Easterly, William & Rebelo, Sergio, 1993. "Fiscal policy and economic growth: An empirical investigation," Journal of Monetary Economics, Elsevier, vol. 32(3), pages 417-458, December.
- Easterly, William & Rebelo, Sérgio, 1994. "Fiscal Policy and Economic Growth: An Empirical Investigation," CEPR Discussion Papers 885, C.E.P.R. Discussion Papers.
- Romer, Paul M, 1990.
"Endogenous Technological Change,"
Journal of Political Economy,
University of Chicago Press, vol. 98(5), pages S71-102, October.
- repec:fth:wobaco:1083 is not listed on IDEAS
- Boyd, John H. & Prescott, Edward C., 1986.
Journal of Economic Theory,
Elsevier, vol. 38(2), pages 211-232, April.
- Bart van Ark & Mary O'Mahoney & Marcel P. Timmer, 2008. "The Productivity Gap between Europe and the United States: Trends and Causes," Journal of Economic Perspectives, American Economic Association, vol. 22(1), pages 25-44, Winter.
- Bose, Niloy & Cothren, Richard, 1996. "Equilibrium loan contracts and endogenous growth in the presence of asymmetric information," Journal of Monetary Economics, Elsevier, vol. 38(2), pages 363-376, October.
- Rebekka Christopoulou & Philip Vermeulen, 2012.
"Markups in the Euro area and the US over the period 1981–2004: a comparison of 50 sectors,"
Springer, vol. 42(1), pages 53-77, February.
- Christopoulou, Rebekka & Vermeulen, Philip, 2008. "Markups in the euro area and the US over the period 1981-2004: a comparison of 50 sectors," Working Paper Series 0856, European Central Bank.
- Tobias J. Moskowitz & Annette Vissing-Jørgensen, 2002. "The Returns to Entrepreneurial Investment: A Private Equity Premium Puzzle?," American Economic Review, American Economic Association, vol. 92(4), pages 745-778, September.
- King, Robert G. & Levine, Ross, 1993. "Finance, entrepreneurship and growth: Theory and evidence," Journal of Monetary Economics, Elsevier, vol. 32(3), pages 513-542, December.
- F. M. Scherer & Dietmar Harhoff & J, rg Kukies, 2000. "Uncertainty and the size distribution of rewards from innovation," Journal of Evolutionary Economics, Springer, vol. 10(1), pages 175-200.
- Paul M Romer, 1999.
"Increasing Returns and Long-Run Growth,"
Levine's Working Paper Archive
2232, David K. Levine.
- Aghion, Philippe & Akcigit, Ufuk & Howitt, Peter, 2013. "What Do We Learn From Schumpeterian Growth Theory?," Working Paper Series in Economics and Institutions of Innovation 298, Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dolly Guarini).
If references are entirely missing, you can add them using this form.