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Financial Contracting, R&D and Growth

Author

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  • Szalay, Dezsö

    (Sonderforschungsbereich 504)

Abstract

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 do innovate less often and to 'rest longer on their laurels', thereby retarding growth.

Suggested Citation

  • Szalay, Dezsö, 1999. "Financial Contracting, R&D and Growth," Sonderforschungsbereich 504 Publications 00-28, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
    • Handle: RePEc:xrs:sfbmaa:00-28
    Note: Special Thanks are due to Martin Hellwig for ongoing discussions and advice. I would also like to thank Malte Cherdron, Mathias Dewatripont, Christian Laux, Benny Moldovanu, Francesco Ricci, the members of the Mannheim Workshop in Economic Theory and the participants of the ULB seminar as well as the participants of the session at ESEM99 in Santiago de Compostela for very useful comments. All errors are my responsibility. Financial Support of the Swiss Science National Foundation is greatfully acknowledged. email: Szalay@pool.uni-mannheim.de
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    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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