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A Schumpeterian Growth Model With Financial Intermediaries

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  • Sunaga, Miho

Abstract

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.

Suggested Citation

  • Sunaga, Miho, 2019. "A Schumpeterian Growth Model With Financial Intermediaries," Macroeconomic Dynamics, Cambridge University Press, vol. 23(4), pages 1679-1702, June.
    • Handle: RePEc:cup:macdyn:v:23:y:2019:i:04:p:1679-1702_00
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    Cited by:

    1. Reynaldo Senra Hodelin, 2020. "Development banking under weak institutions and imperfect credit markets," Annals of Finance, Springer, vol. 16(3), pages 353-380, September.
    2. Reynaldo Senra Hodelin, 2022. "A Schumpeterian growth model on the effect of development banking on growth," Economic Change and Restructuring, Springer, vol. 55(2), pages 607-634, May.

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