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A Schumpeterian Growth Model with Financial Intermediaries

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  • Miho Sunaga

    (Graduate School of Economics, Osaka University)

Abstract

This study introduces financial intermediaries into the Schumpeterian growth model developed by Aghion, Howitt, and Mayer-Foulkes (2005). They collect deposits from households, provide funds for entrepreneurial projects, and monitor the entrepreneurs. I consider an economy with moral hazard problems: entrepreneurs can hide the result of a successful innovation and thereby avoid repaying financial intermediaries if the latter do not monitor entrepreneurial performance. I analyze the effects of financial interme- diaries f activities on technological progress and economic growth in such an economy. I show that financial intermediaries need to monitor entrepreneurs in an economy where the legal protection of creditors is not strong enough. Such monitoring can resolve the moral hazard problem; however, it does not always promote technological innovation, because it could increase the cost of entrepreneurial innovation and thus reduce the amount invested for innovation. I also examine how monitoring by financial intermedi- aries affects the welfare of individuals through the stringency of financial markets.

Suggested Citation

  • Miho Sunaga, 2015. "A Schumpeterian Growth Model with Financial Intermediaries," Discussion Papers in Economics and Business 15-19, Osaka University, Graduate School of Economics.
    • Handle: RePEc:osk:wpaper:1519
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    References listed on IDEAS

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    More about this item

    Keywords

    Economic growth; Innovation; Financial intermediaries; Monitoring;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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