Financial Innovation and Endogenous Growth

32 Pages Posted: 12 Sep 2009

See all articles by Stelios Michalopoulos

Stelios Michalopoulos

Brown University - Department of Economics; Brown University

Ross Levine

University of California, Berkeley - Haas School of Business; National Bureau of Economic Research (NBER)

Luc Laeven

European Central Bank (ECB); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 4 versions of this paper

Date Written: September, 10 2009

Abstract

We model technological and financial innovation as reflecting the decisions of profit maximizing agents and explore the implications for economic growth. We start with a Schumpeterian endogenous growth model where entrepreneurs earn monopoly profits by inventing better goods and financiers arise to screen entrepreneurs. A novel feature of the model is that financiers also engage in the costly, risky, and potentially profitable process of innovation: Financiers can invent more effective processes for screening entrepreneurs. Every existing screening process, however, becomes less effective as technology advances. Consequently, technological innovation and, thus, economic growth stop unless financiers continually innovate. Historical observations and empirical evidence are more consistent with this dynamic model of financial innovation and endogenous growth than with existing models of financial development and growth.

Keywords: Invention, Economic Growth, Corporate Finance, Financial Institutions, Technological Change, Entrepreneurship

JEL Classification: G0, O31, O4

Suggested Citation

Michalopoulos, Stelios and Levine, Ross Eric and Laeven, Luc A., Financial Innovation and Endogenous Growth (September, 10 2009). Available at SSRN: https://ssrn.com/abstract=1471636 or http://dx.doi.org/10.2139/ssrn.1471636

Stelios Michalopoulos

Brown University - Department of Economics ( email )

64 Waterman Street
Providence, RI 02912
United States

HOME PAGE: http://https://sites.google.com/site/steliosecon/

Brown University ( email )

Box 1860
Providence, RI 02912
United States

Ross Eric Levine (Contact Author)

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Luc A. Laeven

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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