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Innovation and growth with financial, and other, frictions

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  • Chiu, Jonathan
  • Meh, Cesaire
  • Wright, Randall

Abstract

The generation and implementation of ideas are crucial for economic performance. We study this in a model of endogenous growth, where productivity increases with innovation, and where the exchange of ideas (technology transfer) allows those with comparative advantage implement them. Search, bargaining, and commitment frictions impede the idea market, however, reducing efficiency and growth. We characterize optimal policies involving subsidies to innovative and entrepreneurial activity, given both knowledge and search externalities. The role of liquidity is discussed. We show intermediation helps by financing more transactions with fewer assets, and, more subtly, by ameliorating holdup problems. We also discuss some evidence.

Suggested Citation

  • Chiu, Jonathan & Meh, Cesaire & Wright, Randall, 2015. "Innovation and growth with financial, and other, frictions," Working Paper Series 4732, Victoria University of Wellington, School of Economics and Finance.
  • Handle: RePEc:vuw:vuwecf:4732
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    File URL: http://researcharchive.vuw.ac.nz/handle/10063/4732
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    Cited by:

    1. Berentsen, Aleksander & Huber, Samuel & Marchesiani, Alessandro, 2016. "The societal benefit of a financial transaction tax," European Economic Review, Elsevier, vol. 89(C), pages 303-323.
    2. Berentsen, Aleksander & Rojas Breu, Mariana & Shi, Shouyong, 2012. "Liquidity, innovation and growth," Journal of Monetary Economics, Elsevier, vol. 59(8), pages 721-737.
    3. Guillaume Rocheteau & Randall Wright & Cathy Zhang, 2018. "Corporate Finance and Monetary Policy," American Economic Review, American Economic Association, vol. 108(4-5), pages 1147-1186, April.
    4. repec:eee:jeborg:v:163:y:2019:i:c:p:297-331 is not listed on IDEAS
    5. Gabrovski, Miroslav, 2017. "Coordination Frictions and Economic Growth," MPRA Paper 81298, University Library of Munich, Germany, revised 17 Jul 2017.
    6. repec:eee:jetheo:v:169:y:2017:i:c:p:551-602 is not listed on IDEAS
    7. Heggedal, Tom-Reiel & Moen, Espen R & Preugschat, Edgar, 2014. "Productivity Spillovers Through Labor Mobility," CEPR Discussion Papers 9850, C.E.P.R. Discussion Papers.
    8. Cipollone, Angela & Giordani, Paolo E., 2019. "Market frictions in entrepreneurial innovation: Theory and evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 163(C), pages 297-331.
    9. Malamud, Semyon & Zucchi, Francesca, 2015. "Liquidity, Innovation, and Endogenous Growth," CEPR Discussion Papers 10840, C.E.P.R. Discussion Papers.
    10. Randall Wright & Xiaolin Xiao & Yu Zhu, 2018. "Frictional Capital Reallocation II: Ex Post Heterogeneity," 2018 Meeting Papers 544, Society for Economic Dynamics.
    11. Ufuk Akcigit & Murat Alp Celik & Jeremy Greenwood, 2016. "Buy, Keep, or Sell: Economic Growth and the Market for Ideas," Econometrica, Econometric Society, vol. 84, pages 943-984, May.
    12. Chu, Angus C. & Kan, Kamhon & Lai, Ching-Chong & Liao, Chih-Hsing, 2014. "Money, random matching and endogenous growth: A quantitative analysis," Journal of Economic Dynamics and Control, Elsevier, vol. 41(C), pages 173-187.
    13. Angela Cipollone & Paolo Giordani, 2012. "Animal Spirits and Entrepreneurial Innovation: Theory and Evidence," Working Papers CASMEF 1210, Dipartimento di Economia e Finanza, LUISS Guido Carli.
    14. Buera, Francisco J. & Oberfield, Ezra, 2015. "The Global Diffusion of Ideas," Working Paper Series WP-2016-13, Federal Reserve Bank of Chicago.
    15. repec:eee:dyncon:v:97:y:2018:i:c:p:19-37 is not listed on IDEAS
    16. Angela, Cipollone & Paolo E., Giordani, 2016. "When Entrepreneurs Meet Financiers: Evidence from the Business Angel Market," MPRA Paper 69545, University Library of Munich, Germany.
    17. repec:eee:dyncon:v:89:y:2018:i:c:p:100-116 is not listed on IDEAS
    18. Malamud, Semyon & Zucchi, Francesca, 2016. "Liquidity, innovation, and endogenous growth," Working Paper Series 1919, European Central Bank.
    19. Randall Wright & Sylvia Xiaolin Xiao & Yu Zhu, 2019. "Frictional Capital Reallocation I: Ex Ante Heterogeneity," Staff Working Papers 19-4, Bank of Canada.
    20. Francisco Buera, 2014. "The Global Diffusion of Ideas," 2014 Meeting Papers 1099, Society for Economic Dynamics.
    21. Paolo Giordani, 2015. "Entrepreneurial finance and economic growth," Journal of Economics, Springer, vol. 115(2), pages 153-174, June.
    22. Grechyna, Daryna, 2018. "Firm size, bank size, and financial development," Journal of Economic Dynamics and Control, Elsevier, vol. 97(C), pages 19-37.
    23. Dimitris Papanikolaou, 2015. "Cooperation Cycles: A theory of endogenous investment shocks," 2015 Meeting Papers 71, Society for Economic Dynamics.
    24. Sylvia Xiao & Randall Wright & Guillaume Rocheteau, 2017. "Open Market Operations," 2017 Meeting Papers 345, Society for Economic Dynamics.

    More about this item

    Keywords

    Innovation; Growth; Liquidity; Intermediation; Search; Bargaining;

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • G2 - Financial Economics - - Financial Institutions and Services
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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