Liquidity, Innovation, and Endogenous Growth
72 Pages Posted: 4 Jan 2017 Last revised: 7 Dec 2018
Date Written: March 13, 2018
We build a model of endogenous, innovation-driven growth in which innovative firms have costly access to outside financing and hoard cash reserves to maintain financial flexibility. We show that financing frictions slow down Schumpeterian creative destruction by discouraging entry. As a result, financing frictions importantly affect the composition of growth, by reducing the contribution of entrants but spurring the contribution of incumbents. We investigate the net impact of these countervailing effects on the equilibrium growth rate and welfare.
Keywords: Innovation; Cash management; Financing frictions; Endogenous growth
JEL Classification: G31; G32; O31; O40
Suggested Citation: Suggested Citation