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Financial Contracting, R&D and Growth

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Abstract

This paper investigates the role of financial constraints in R&D races of the type used in Schumpeterian growth theory. In a world of perfect capital markets these models predict that all innovations come from industry outsiders. In reality, however, we observe a pronounced persistence of some dominant firms. We show that this persistence can be explained by constraints on financial contracting. The paper highlights an indirect channel through which agency costs reduce growth: due to agency costs incumbents face little competition from outsiders. Therefore they can afford to innovate less often and to ''rest longer on their laurels'', thereby retarding growth.

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File URL: http://www.vwl.uni-mannheim.de/gk/wp/gkwp-1999-03.pdf
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Bibliographic Info

Paper provided by Post Graduate Programme "Allocation on Financial Markets", University of Mannheim in its series GK working paper series with number 1999-03.

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Length: 28 pages
Date of creation: 01 Oct 1998
Date of revision: 08 Dec 1999
Handle: RePEc:xrs:gkwopa:1999-03

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Keywords: moral hazard; inside/outside finance; patent race; endogenous growth;

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