Knowledge, Technology Adoption and Financial Innovation
34 Pages Posted: 3 Jan 2007
Date Written: June 2005
Abstract
Why are new financial instruments created? This paper proposes the view that financial development arises as a response to the contractual needs of emerging technologies. Exogenous technological progress generates a demand for new financial instruments in order to share risk or overcome private information, for example. A model of the dynamics of technology adoption and the evolution of financial instruments that support such adoption is presented. Early adoption may be required for financial markets to learn the technology; once learned, financial innovation boosts adoption further. Financial learning emerges as a source of technological diffusion. The analysis identifies a causality link from technology to finance which is nonetheless consistent with empirical findings of a positive effect of current financial development on future growth.
Keywords: Keywords: Financial innovation, Technology adoption, Learning
JEL Classification: G20, N20, O30
Suggested Citation: Suggested Citation
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