Financial Innovation and Endogenous Growth

35 Pages Posted: 7 Oct 2009

See all articles by Luc Laeven

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)

Stelios Michalopoulos

Brown University - Department of Economics; Brown University

Multiple version iconThere are 4 versions of this paper

Date Written: September 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: Corporate Finance, Economic Growth, Entrepreneurship, Financial Institutions, Invention, Technological change

JEL Classification: G0, O31, O4

Suggested Citation

Laeven, Luc A. and Levine, Ross Eric and Michalopoulos, Stelios, Financial Innovation and Endogenous Growth (September 2009). CEPR Discussion Paper No. DP7465. Available at SSRN: https://ssrn.com/abstract=1484498

Luc A. Laeven (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Ross Eric Levine

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

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

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