Financial Innovation and Endogenous Growth

37 Pages Posted: 21 Sep 2009 Last revised: 29 Oct 2014

See all articles by Stelios Michalopoulos

Stelios Michalopoulos

Brown University - Department of Economics; Brown University

Luc Laeven

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

Ross Levine

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

Multiple version iconThere are 4 versions of this paper

Date Written: September 2009

Abstract

Is financial innovation necessary for sustaining economic growth? To address this question, we build a Schumpeterian model in which entrepreneurs earn profits by inventing better goods and profit-maximizing financiers arise to screen entrepreneurs. The model has two novel features. First, financiers engage in the costly but potentially profitable process of innovation: they can invent better methods for screening entrepreneurs. Second, every screening process becomes less effective as technology advances. The model predicts that technological innovation and economic growth eventually stop unless financiers innovate. Empirical evidence is consistent with this dynamic, synergistic model of financial and technological innovation.

Suggested Citation

Michalopoulos, Stelios and Laeven, Luc A. and Levine, Ross Eric, Financial Innovation and Endogenous Growth (September 2009). NBER Working Paper No. w15356. Available at SSRN: https://ssrn.com/abstract=1475548

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

Luc A. Laeven

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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

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