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Financial Contracting, R&D and Growth



This paper investigates the role of financial constraints in R&D races of the type used in Schumpeterian growth theory. In a world of perfect capital markets these models predict that all innovations come from industry outsiders. In reality, however, we observe a pronounced persistence of some dominant firms. We show that this persistence can be explained by constraints on financial contracting. The paper highlights an indirect channel through which agency costs reduce growth: due to agency costs incumbents face little competition from outsiders. Therefore they can afford to innovate less often and to ''rest longer on their laurels'', thereby retarding growth.

Suggested Citation

  • Dezsö Szalay, 1998. "Financial Contracting, R&D and Growth," GK working paper series 1999-03, Post Graduate Programme "Allocation on Financial Markets", University of Mannheim, revised 08 Dec 1999.
  • Handle: RePEc:xrs:gkwopa:1999-03

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    moral hazard; inside/outside finance; patent race; endogenous growth;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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