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A SCHUMPETERIAN GROWTH MODEL WITH FINANCIAL INTERMEDIARIES

Published online by Cambridge University Press:  27 March 2018

Miho Sunaga
Miho Sunaga*
Affiliation:
Osaka University
*
Address correspondence to: Miho Sunaga, Graduate School of Economics, Osaka University, 1-7 Machikaneyama, Toyonaka, Osaka 560-0043, Japan; e-mail: pge014sm@student.econ.osaka-u.ac.jp.
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Abstract

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This study introduces financial intermediaries into the Schumpeterian growth model developed by Aghion et al. (2005, Quarterly Journal of Economics, Vol. 120, pp. 173–222). They collect deposits from households, provide funds for entrepreneurial projects, and monitor the entrepreneurs. I consider an economy with moral hazard problems: entrepreneurs can hide the result of a successful innovation and thereby avoid repaying financial intermediaries if the latter do not monitor entrepreneurial performance. I analyze the effects of financial intermediaries' activities on technological progress and economic growth in such an economy. I show that financial intermediaries need to monitor entrepreneurs in an economy where the legal protection of creditors is not strong enough. Such monitoring can resolve the moral hazard problem; however, it does not always promote technological innovation, because it could increase the cost of entrepreneurial innovation and thus reduce the amount invested for innovation. I also examine how monitoring by financial intermediaries affects the welfare of individuals through the stringency of financial markets.

Keywords

Economic GrowthInnovationFinancial IntermediariesMonitoring

Information

Type
Articles
Information
Macroeconomic Dynamics , Volume 23 , Issue 4 , June 2019, pp. 1679 - 1702
Copyright
Copyright © Cambridge University Press 2018 

Footnotes

*

Research Fellow of Japan Society for the Promotion of Science (JSPS Research Fellow).

I would like to thank the editor and two anonymous referees for their valuable comments. I would also like to thank Koichi Futagami, Tatsuro Iwaisako, Shingo Ishiguro, Katsuya Takii, and the participants of the Japanese Economic Association Spring Meeting 2014 at Doshisha University for their helpful comments and suggestions. I acknowledge financial support from Grant-in-Aid for JSPS Fellows (Grant No. 16J02799).

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