Access to Finance, Product Innovation and Middle-Income Traps

39 Pages Posted: 20 Apr 2016

See all articles by Pierre-Richard Agenor

Pierre-Richard Agenor

University of Manchester - School of Social Sciences

Otaviano Canuto

World Bank

Date Written: February 1, 2014

Abstract

This paper studies interactions between access to finance, product innovation, and labor supply in a two-period overlapping generations model with an endogenous skill distribution and credit market frictions. In the model lack of access to finance (induced by high monitoring costs) has an adverse effect on innovation activity not only directly but also indirectly, because too few individuals may choose to invest in skills. If monitoring costs fall with the number of successful projects, multiple equilibria may emerge, one of which, a middle-income trap, characterized by low wages in the design sector, a low share of the labor force engaged in innovation activity, and low growth. A sufficiently ambitious policy aimed at alleviating constraints on access to finance by innovators may allow a country to move away from such a trap by promoting the production of ideas and improving incentives to invest in skills.

Keywords: Labor Policies, Access to Finance, Debt Markets, Economic Theory & Research, Banks & Banking Reform

Suggested Citation

Agenor, Pierre-Richard and Canuto, Otaviano, Access to Finance, Product Innovation and Middle-Income Traps (February 1, 2014). World Bank Policy Research Working Paper No. 6767. Available at SSRN: https://ssrn.com/abstract=2390954

Pierre-Richard Agenor (Contact Author)

University of Manchester - School of Social Sciences ( email )

Oxford Road
Manchester, M13 9PL
United Kingdom

Otaviano Canuto

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

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