IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this article

Innovation, bank monitoring, and endogenous financial development

  • de la Fuente, Angel
  • Marin, JoseMaria

This paper analyses the interaction between capital accumulation, technological progress and financial development. Growth is sustained by the development of new varieties of intermediate goods. Innovation is risky and the probability of success depends on entrepreneurs' actions, which can only be imperfectly observed by outsiders through the use of a costly monitoring technology. Financial intermediaries emerge to avoid the duplication of monitoring activities and negotiate incentive contracts with innovators. Monitoring intensity is determined endogenously as a function of factor prices and determines the risk premium required by risk-averse researchers. Natural forward and backward links arise between finance and innovation. By allowing for better risk sharing, closer monitoring yields a higher level of innovative activity in equilibrium and faster growth. Under plausible assumptions, the resulting changes in factor prices lower the relative cost of monitoring, leading to a further increase in the efficiency of the financial sector.

(This abstract was borrowed from another version of this item.)

If 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.

File URL: http://www.sciencedirect.com/science/article/pii/S0304-3932(96)01277-9
Download Restriction: Full text for ScienceDirect subscribers only

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 38 (1996)
Issue (Month): 2 (October)
Pages: 269-301

as
in new window

Handle: RePEc:eee:moneco:v:38:y:1996:i:2:p:269-301
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

References listed on IDEAS
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.:

as in new window
  1. Grossman, Gene M & Helpman, Elhanan, 1989. "Product Development and International Trade," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1261-1283, December.
  2. Robert G. King & Ross Levine, 1993. "Finance and Growth: Schumpeter Might Be Right," The Quarterly Journal of Economics, Oxford University Press, vol. 108(3), pages 717-737.
  3. Stephen D. Williamson, 1984. "Costly Monitoring, Financial Intermediation, and Equilibrium Credit Rationing," Working Papers 583, Queen's University, Department of Economics.
  4. Judd, Kenneth L, 1985. "On the Performance of Patents," Econometrica, Econometric Society, vol. 53(3), pages 567-585, May.
  5. Saint-Paul, Gilles, 1992. "Technological choice, financial markets and economic development," European Economic Review, Elsevier, vol. 36(4), pages 763-781, May.
  6. Hayne E. Leland and David H. Pyle., 1976. "Informational Asymmetries, Financial Structure, and Financial Intermediation," Research Program in Finance Working Papers 41, University of California at Berkeley.
  7. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-1037, October.
  8. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
  9. Douglas Gale & Martin Hellwig, 1985. "Incentive-Compatible Debt Contracts: The One-Period Problem," Review of Economic Studies, Oxford University Press, vol. 52(4), pages 647-663.
  10. Ross Levine, 1990. "Financial structure and economic development," International Finance Discussion Papers 381, Board of Governors of the Federal Reserve System (U.S.).
  11. Ben S. Bernanke & Mark L. Gertler, 1985. "Banking in General Equilibrium," NBER Working Papers 1647, National Bureau of Economic Research, Inc.
  12. Bencivenga, V.R. & Smith, B.D., 1988. "Financial Intermediation And Endogenous Growth," RCER Working Papers 124, University of Rochester - Center for Economic Research (RCER).
  13. Townsend, Robert M., 1979. "Optimal contracts and competitive markets with costly state verification," Journal of Economic Theory, Elsevier, vol. 21(2), pages 265-293, October.
  14. Paul M Romer, 1999. "Endogenous Technological Change," Levine's Working Paper Archive 2135, David K. Levine.
  15. Sussman, Oren & Zeira, Joseph, 1995. "Banking and Development," CEPR Discussion Papers 1127, C.E.P.R. Discussion Papers.
  16. Dilip Mookherjee & Ivan Png, 1989. "Optimal Auditing, Insurance, and Redistribution," The Quarterly Journal of Economics, Oxford University Press, vol. 104(2), pages 399-415.
  17. Roubini, Nouriel & Sala-i-Martin, Xavier, 1992. "Financial repression and economic growth," Journal of Development Economics, Elsevier, vol. 39(1), pages 5-30, July.
  18. Ronald A. Dye, 1986. "Optimal Monitoring Policies in Agencies," RAND Journal of Economics, The RAND Corporation, vol. 17(3), pages 339-350, Autumn.
  19. Ángel de la Fuente & José M. Marín, 1994. "Innovation, "bank" monitoring and endogenous financial development," Economics Working Papers 59, Department of Economics and Business, Universitat Pompeu Fabra.
  20. Levine, Ross, 1991. " Stock Markets, Growth, and Tax Policy," Journal of Finance, American Finance Association, vol. 46(4), pages 1445-1465, September.
  21. Greenwood, Jeremy & Jovanovic, Boyan, 1988. "Financial Development, Growth, And The Distribution Of Income," Working Papers 88-12, C.V. Starr Center for Applied Economics, New York University.
  22. Douglas W. Diamond, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Oxford University Press, vol. 51(3), pages 393-414.
  23. Blackburn, K. & Hung, V.T.Y., 1993. "A theory of growth, financial development and trade," Discussion Paper Series In Economics And Econometrics 9303, Economics Division, School of Social Sciences, University of Southampton.
  24. Oriol Amat, 1993. "The relationship between tax regulations and financial accounting: A comparison of Germany, Spain and the United Kingdom," Economics Working Papers 46, Department of Economics and Business, Universitat Pompeu Fabra.
  25. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
  26. Pagano, Marco, 1993. "Financial markets and growth: An overview," European Economic Review, Elsevier, vol. 37(2-3), pages 613-622, April.
  27. Kenneth Arrow, 1962. "Economic Welfare and the Allocation of Resources for Invention," NBER Chapters, in: The Rate and Direction of Inventive Activity: Economic and Social Factors, pages 609-626 National Bureau of Economic Research, Inc.
  28. 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.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:eee:moneco:v:38:y:1996:i:2:p:269-301. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Shamier, Wendy)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.