Financial Innovation and Endogenous Growth

Stelios Michalopoulos, Luc Lueven and Ross Levine ()

No 746, Discussion Papers Series, Department of Economics, Tufts University from Department of Economics, Tufts University

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 entrepeneurs. 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: Invention; Economic Growth; Corporate Finance; Financial Institutions; Technological Change; Entrepreneurship. (search for similar items in EconPapers)
JEL-codes: G0 O31 O4 (search for similar items in EconPapers)
Date: 2010
New Economics Papers: this item is included in nep-dge, nep-ent, nep-fdg, nep-ino and nep-sbm
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Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Financial innovation and endogenous growth (2015)
Working Paper: Financial Innovation and Endogenous Growth (2011)
Working Paper: Financial Innovation and Endogenous Growth (2009)
Working Paper: Financial Innovation and Endogenous Growth (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:tuf:tuftec:0746

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