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Financial Risks and Research Contracts in a Model of Endogenous Growth

Author

Listed:
  • Colin Davis

    (Faculty of Economics, Kobe University, Japan)

  • Laixun Zhao

    (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan)

Abstract

This paper examines researchers' choices between either collaborating with venture capitalists (Regime C) or going independently (Regime I), and how their interaction affects long-run endogenous growth, in an economy characterized by incomplete contracts and financial market imperfections. Both research and production require labor and physical capital. We find that an improvement in financial regulation leads to a higher rate of innovation under Regime I. In contrast, an improvement in R&D incentives for researchers in Regime C can coincide with either an increase or a decrease in the long-run rate of innovation, due to the holdup problem in post bargaining over created value. We also rank the growth rates in the two regimes under different contractual and financial environments. Finally, we find that conflicts can arise when entrepreneurs choose one regime based on investment incentives but the other regime provides a higher growth rate.

Suggested Citation

  • Colin Davis & Laixun Zhao, 2010. "Financial Risks and Research Contracts in a Model of Endogenous Growth," Discussion Paper Series DP2010-08, Research Institute for Economics & Business Administration, Kobe University.
  • Handle: RePEc:kob:dpaper:dp2010-08
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    File URL: https://www.rieb.kobe-u.ac.jp/academic/ra/dp/English/DP2010-08.pdf
    File Function: First version, 2010
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    More about this item

    Keywords

    Firm-asymmetry; Endogenous Growth; R&D; Incomplete Contracts; Financial Imperfection;

    JEL classification:

    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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