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Innovation And Growth With Financial, And Other, Frictions

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  • Jonathan Chiu
  • Cesaire Meh
  • Randall Wright

Abstract

The generation of ideas and their implementation are crucial for economic performance. We study this in a model of endogenous growth, where productivity increases with innovation and where the exchange of ideas (technology transfer) allows those with comparative advantage to implement them. Search, bargaining, and commitment frictions impede the idea market, however, reducing efficiency and growth. We characterize optimal policies involving subsidies to innovative and entrepreneurial activity, given both knowledge and search externalities. The role of liquidity is discussed. We show intermediation helps by financing more transactions with fewer assets and, more subtly, by ameliorating holdup problems. We also discuss some evidence.

Suggested Citation

  • Jonathan Chiu & Cesaire Meh & Randall Wright, 2017. "Innovation And Growth With Financial, And Other, Frictions," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 58, pages 95-125, February.
  • Handle: RePEc:wly:iecrev:v:58:y:2017:i::p:95-125
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    Cited by:

    1. Berentsen, Aleksander & Huber, Samuel & Marchesiani, Alessandro, 2016. "The societal benefit of a financial transaction tax," European Economic Review, Elsevier, vol. 89(C), pages 303-323.
    2. Berentsen, Aleksander & Rojas Breu, Mariana & Shi, Shouyong, 2012. "Liquidity, innovation and growth," Journal of Monetary Economics, Elsevier, vol. 59(8), pages 721-737.
    3. Guillaume Rocheteau & Randall Wright & Cathy Zhang, 2018. "Corporate Finance and Monetary Policy," American Economic Review, American Economic Association, vol. 108(4-5), pages 1147-1186, April.
    4. Gabrovski, Miroslav, 2017. "Coordination Frictions and Economic Growth," MPRA Paper 81298, University Library of Munich, Germany, revised 17 Jul 2017.
    5. repec:eee:jetheo:v:169:y:2017:i:c:p:551-602 is not listed on IDEAS
    6. Heggedal, Tom-Reiel & Moen, Espen R & Preugschat, Edgar, 2014. "Productivity Spillovers Through Labor Mobility," CEPR Discussion Papers 9850, C.E.P.R. Discussion Papers.
    7. Angela Cipollone & Paolo E. Giordani, 2015. "Market Frictions in Entrepreneurial Innovation: Theory and Evidence," Working Papers CELEG 1505, Dipartimento di Economia e Finanza, LUISS Guido Carli.
    8. Malamud, Semyon & Zucchi, Francesca, 2015. "Liquidity, Innovation, and Endogenous Growth," CEPR Discussion Papers 10840, C.E.P.R. Discussion Papers.
    9. Ufuk Akcigit & Murat Alp Celik & Jeremy Greenwood, 2016. "Buy, Keep, or Sell: Economic Growth and the Market for Ideas," Econometrica, Econometric Society, vol. 84, pages 943-984, May.
    10. Chu, Angus C. & Kan, Kamhon & Lai, Ching-Chong & Liao, Chih-Hsing, 2014. "Money, random matching and endogenous growth: A quantitative analysis," Journal of Economic Dynamics and Control, Elsevier, vol. 41(C), pages 173-187.
    11. Angela Cipollone & Paolo Giordani, 2012. "Animal Spirits and Entrepreneurial Innovation: Theory and Evidence," Working Papers CASMEF 1210, Dipartimento di Economia e Finanza, LUISS Guido Carli.
    12. Buera, Francisco J. & Oberfield, Ezra, 2015. "The Global Diffusion of Ideas," Working Paper Series WP-2016-13, Federal Reserve Bank of Chicago.
    13. Angela, Cipollone & Paolo E., Giordani, 2016. "When Entrepreneurs Meet Financiers: Evidence from the Business Angel Market," MPRA Paper 69545, University Library of Munich, Germany.
    14. Malamud, Semyon & Zucchi, Francesca, 2016. "Liquidity, innovation, and endogenous growth," Working Paper Series 1919, European Central Bank.
    15. Francisco Buera, 2014. "The Global Diffusion of Ideas," 2014 Meeting Papers 1099, Society for Economic Dynamics.
    16. Paolo Giordani, 2015. "Entrepreneurial finance and economic growth," Journal of Economics, Springer, vol. 115(2), pages 153-174, June.
    17. Grechyna, Daryna, 2017. "Firm Size, Bank Size, and Financial Development," MPRA Paper 83196, University Library of Munich, Germany.
    18. Dimitris Papanikolaou, 2015. "Cooperation Cycles: A theory of endogenous investment shocks," 2015 Meeting Papers 71, Society for Economic Dynamics.
    19. Sylvia Xiao & Randall Wright & Guillaume Rocheteau, 2017. "Open Market Operations," 2017 Meeting Papers 345, Society for Economic Dynamics.

    More about this item

    JEL classification:

    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

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