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How Well Does the Market Allocate Entrepreneurs?

  • Baochun Peng
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    This paper offers a synthesis of two Schumpeterian views: that growth is driven by innovation, and that the level of financial market development affects the growth process. We adopt an endogenous growth model where growth is driven by R&D activities of entrepreneurs. Entrepreneurs must borrow to fund R&D, but heterogeneity and unobservability of entrepreneurial ability creates credit restriction. The extent of financial market development is defined as the number of high ability agents in the financial market. Having a more developed financial market facilitates the allocatin of resources to the innovation sector, at the same time reduces the number of entrepreneurs available to the innovation sector. We characterize equilibrium in the financial market, and find that market allocation of entrepreneurs only coincides with the growth maximising allocation when all value created by innovation are divided by entrepreneurs, otherwise the market allocation is typically not growth maximising, and low grow trap may exist.

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    Paper provided by Centre for Research into Industry, Enterprise, Finance and the Firm in its series CRIEFF Discussion Papers with number 0025.

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    Date of creation: Feb 2000
    Date of revision:
    Handle: RePEc:san:crieff:0025
    Contact details of provider: Postal: School of Economics and Finance, University of St. Andrews, Fife KY16 9AL
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    1. LeRoy, Stephen F & Singell, Larry D, Jr, 1987. "Knight on Risk and Uncertainty," Journal of Political Economy, University of Chicago Press, vol. 95(2), pages 394-406, April.
    2. Jappelli, Tullio & Pagano, Marco, 1994. "Saving, Growth, and Liquidity Constraints," The Quarterly Journal of Economics, MIT Press, vol. 109(1), pages 83-109, February.
    3. King, Robert G. & Levine, Ross, 1993. "Finance and growth : Schumpeter might be right," Policy Research Working Paper Series 1083, The World Bank.
    4. Douglas Holtz-Eakin & David Joulfaian & Harvey S. Rosen, 1993. "Sticking it Out: Entrepreneurial Survival and Liquidity Constraints," NBER Working Papers 4494, National Bureau of Economic Research, Inc.
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    6. Paul Romer, 1989. "Endogenous Technological Change," NBER Working Papers 3210, National Bureau of Economic Research, Inc.
    7. Cooley, Thomas F. & Smith, Bruce D., 1998. "Financial markets, specialization, and learning by doing," Research in Economics, Elsevier, vol. 52(4), pages 333-361, December.
    8. Greenwood, Jeremy & Jovanovic, Boyan, 1988. "Financial Development, Growth, And The Distribution Of Income," Working Papers 88-12, C.V. Starr Center for Applied Economics, New York University.
    9. Aghion, P. & Howitt, P., 1989. "A Model Of Growth Through Creative Destruction," UWO Department of Economics Working Papers 8904, University of Western Ontario, Department of Economics.
    10. Saint-Paul, G., 1990. "Technological Choice, Financial Markets and Economic Development," DELTA Working Papers 90-30, DELTA (Ecole normale supérieure).
    11. Zsolt Becsi & Ping Wang & Mark A. Wynne, 1998. "Endogenous market structures and financial development," FRB Atlanta Working Paper 98-15, Federal Reserve Bank of Atlanta.
    12. Roubini, N. & Sala-I-Martin, X., 1991. "Financial development , the Trade Regime and Economic Growth," Papers 646, Yale - Economic Growth Center.
    13. Gene M. Grossman & Elhanan Helpman, 1989. "Quality Ladders in the Theory of Growth," NBER Working Papers 3099, National Bureau of Economic Research, Inc.
    14. Ross Levine, 1997. "Financial Development and Economic Growth: Views and Agenda," Journal of Economic Literature, American Economic Association, vol. 35(2), pages 688-726, June.
    15. King, Robert G. & Levine, Ross, 1993. "Finance, entrepreneurship and growth: Theory and evidence," Journal of Monetary Economics, Elsevier, vol. 32(3), pages 513-542, December.
    16. Paul M Romer, 1999. "Increasing Returns and Long-Run Growth," Levine's Working Paper Archive 2232, David K. Levine.
    17. Jayaratne, Jith & Strahan, Philip E, 1996. "The Finance-Growth Nexus: Evidence from Bank Branch Deregulation," The Quarterly Journal of Economics, MIT Press, vol. 111(3), pages 639-70, August.
    18. Bencivenga, Valerie R. & Smith, Bruce D., 1998. "Economic development and financial depth in a model with costly financial intermediation," Research in Economics, Elsevier, vol. 52(4), pages 363-386, December.
    19. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth Through Creative Destruction," Scholarly Articles 12490578, Harvard University Department of Economics.
    20. Raghuram G. Rajan & Luigi Zingales, 1996. "Financial Dependence and Growth," NBER Working Papers 5758, National Bureau of Economic Research, Inc.
    21. repec:fth:wobaco:1083 is not listed on IDEAS
    22. Evans, David S & Jovanovic, Boyan, 1989. "An Estimated Model of Entrepreneurial Choice under Liquidity Constraints," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 808-27, August.
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