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Financial Innovation and Endogenous Growth

  • Stelios Michalopoulos
  • Luc Laeven
  • Ross Levine

Is financial innovation necessary for sustaining economic growth? To address this question, we build a Schumpeterian model in which entrepreneurs earn profits by inventing better goods and profit-maximizing financiers arise to screen entrepreneurs. The model has two novel features. First, financiers engage in the costly but potentially profitable process of innovation: they can invent better methods for screening entrepreneurs. Second, every screening process becomes less effective as technology advances. The model predicts that technological innovation and economic growth eventually stop unless financiers innovate. Empirical evidence is consistent with this dynamic, synergistic model of financial and technological innovation.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15356.

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Date of creation: Sep 2009
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Publication status: published as Laeven, Luc & Levine, Ross & Michalopoulos, Stelios, 2015. "Financial innovation and endogenous growth," Journal of Financial Intermediation, Elsevier, vol. 24(1), pages 1-24.
Handle: RePEc:nbr:nberwo:15356
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