Financing Constraints and a Firm's Decision and Ability to Innovate: Establishing Direct and Reverse Effects
London School of Economics & Political Science (LSE) - Department of Economics
University Paris-Est Créteil (UPEC)
Banque de France Working Paper No. 202
The paper analyzes the existence and impact of financing constraints as a possibly serious obstacle to innovation by .rms. The econometric framework we employ in our study is the simultaneous bivariate probit with mutual endogeneity of direct indicators of financial constraints and innovation decisions by firms. A novel method for establishing coherency conditions is used. It allows us for the first time to estimate models hitherto classified as incoherent through the use of prior sign restrictions on model parameters. We are thus able to quantify the interaction between financing constraints and a firm's decision and ability to innovate without forcing the econometric models to be recursive. Hence, we obtain direct as well as reverse interaction effects, leading us to conclude that binding financing constraints discourage innovation and at the same time innovative firms are more likely to face binding financing constraints.
Number of Pages in PDF File: 48
Keywords: DSGE model, currency union, heterogeneity, matching frictions, welfare
JEL Classification: C51, C52, C15working papers series
Date posted: September 22, 2010
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