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Financial Innovation and Endogenous Growth

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  • Stelios Michalopoulos
  • Luc Lueven
  • Ross Levine

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 entrepeneurs. 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 Department of Economics, Tufts University in its series Discussion Papers Series, Department of Economics, Tufts University with number 0746.

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Date of creation: 2010
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Handle: RePEc:tuf:tuftec:0746

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Web page: http://ase.tufts.edu/econ

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

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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. 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.
  3. 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.
  4. Sun, Puyang & Sen, Somnath & Jin, Shujing, 2012. "Equity market liberalization, credit constraints and income inequality," Economics Discussion Papers 2012-22, Kiel Institute for the World Economy.
  5. J.W.B. Bos & J. Kolari & R. van Lamoen, 2009. "Competition and innovation: evidence from financial services," Working Papers 09-16, Utrecht School of Economics.
  6. 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.
  7. Song. Fenghua & Thakor, Anjan, 2013. "Notes on financial system development and political intervention," Policy Research Working Paper Series 6350, The World Bank.
  8. Gründler, Klaus & Weitzel, Jan, 2013. "The financial sector and economic growth in a panel of countries," Wirtschaftswissenschaftliche Beiträge 123, Julius-Maximilians-Universität Würzburg, Lehrstuhl für Volkswirtschaftslehre, insbes. Wirtschaftsordnung und Sozialpolitik.
  9. Beck, T.H.L., 2011. "The Future of Banking," Open Access publications from Tilburg University urn:nbn:nl:ui:12-5046877, Tilburg University.
  10. Luc Laeven, 2011. "Banking Crises: A Review," Annual Review of Financial Economics, Annual Reviews, vol. 3(1), pages 17-40, December.
  11. 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.

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