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Liquidity, innovation, and endogenous growth

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  • Malamud, Semyon
  • Zucchi, Francesca

Abstract

We build a model of endogenous, innovation-driven growth in which innovative firms have costly access to outside financing and hoard cash reserves to maintain financial flexibility. We show that financing frictions slow down Schumpeterian creative destruction by discouraging entry. As a result, financing frictions importantly affect the composition of growth, by reducing the contribution of entrants but spurring the contribution of incumbents. We investigate the net impact of these countervailing effects on the equilibrium growth rate and welfare.

Suggested Citation

  • Malamud, Semyon & Zucchi, Francesca, 2019. "Liquidity, innovation, and endogenous growth," Journal of Financial Economics, Elsevier, vol. 132(2), pages 519-541.
    • Handle: RePEc:eee:jfinec:v:132:y:2019:i:2:p:519-541
    DOI: 10.1016/j.jfineco.2018.11.002
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    Keywords

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    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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