Innovation and Growth with Financial, and Other, Frictions

54 Pages Posted: 22 Mar 2015

See all articles by Jonathan Chiu

Jonathan Chiu

Bank of Canada

Césaire Assah Meh

Government of Canada - Department of Monetary and Financial Analysis

Randall Wright

University of Wisconsin - Madison - Department of Finance, Investment and Banking; Federal Reserve Banks - Federal Reserve Bank of Minneapolis

Multiple version iconThere are 2 versions of this paper

Date Written: March 2013

Abstract

The generation and implementation of ideas, or knowledge, is crucial for economic performance. We study this process in a model of endogenous growth with frictions. Productivity increases with knowledge, which advances via innovation, and with the exchange of ideas from those who generate them to those best able to implement them (technology transfer). But frictions in this market — including search, bargaining, and commitment problems — impede exchange and thus slow growth. We characterize optimal policies to subsidize research and trade in ideas, given both knowledge and search externalities. We discuss the roles of liquidity and financial institutions, and show two ways in which intermediation can enhance efficiency and innovation. First, intermediation allows us to finance more transactions with fewer assets. Second, it ameliorates certain bargaining problems, by allowing entrepreneurs to undo otherwise sunk investments in liquidity. We also discuss some evidence suggesting that technology transfer is a significant source of innovation and showing how it is affected by credit considerations.

Keywords: innovation, growth, ideas, technology transfer, liquidity, financial intermediation, search and bargaining

JEL Classification: E04, G02, O03, O04

Suggested Citation

Chiu, Jonathan and Meh, Césaire Assah and Wright, Randall D., Innovation and Growth with Financial, and Other, Frictions (March 2013). FRB Atlanta CQER Working Paper No. 13-01. Available at SSRN: https://ssrn.com/abstract=2583519 or http://dx.doi.org/10.2139/ssrn.2583519

Jonathan Chiu

Bank of Canada ( email )

234 Wellington St.
Ottawa, Ontario K1A 0G9
Canada

Césaire Assah Meh

Government of Canada - Department of Monetary and Financial Analysis ( email )

Ottawa, Ontario K1A 0G9
Canada
613-782-7564 (Phone)
613-782-7508 (Fax)

Randall D. Wright (Contact Author)

University of Wisconsin - Madison - Department of Finance, Investment and Banking ( email )

975 University Avenue
Madison, WI 53706
United States
608-263-3860 (Phone)

Federal Reserve Banks - Federal Reserve Bank of Minneapolis

90 Hennepin Avenue
Minneapolis, MN 55480
United States

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