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Liquidity, Innovation, And Endogenous Growth

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  • Semyon MALAMUD

    (Ecole Polytechnique Federale de Lausanne and Swiss Finance Institute)

  • Francesca ZUCCHI

    (Ecole Polytechnique Federale de Lausanne and Swiss Finance Institute)

Abstract

We study optimal liquidity management, innovation, and production decisions for a continuum of firms facing financing frictions and the threat of creative destruction. We show that liquidity constraints unambiguously lead firms to decrease their production rate but, surprisingly, may spur investment in innovation (R&D). Using the model, we characterize which firms substitute production for innovation when constrained and thus display a non-monotonic relation between cash reserves and R&D. We embed our single-firm dynamics in a Schumpeterian model of endogenous growth and demonstrate that financing frictions have an ambiguous effect on economic growth.

Suggested Citation

  • Semyon MALAMUD & Francesca ZUCCHI, 2015. "Liquidity, Innovation, And Endogenous Growth," Swiss Finance Institute Research Paper Series 15-41, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1541
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    More about this item

    Keywords

    Innovation; Cash management; Financial constraints; Endogenous growth; Creative destruction;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • 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
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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