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Innovation, bank monitoring, and endogenous financial development

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  • de la Fuente, Angel
  • Marin, JoseMaria

Abstract

This paper analyses the interaction between capital accumulation, technological progress and financial development. Growth is sustained by the development of new varieties of intermediate goods. Innovation is risky and the probability of success depends on entrepreneurs' actions, which can only be imperfectly observed by outsiders through the use of a costly monitoring technology. Financial intermediaries emerge to avoid the duplication of monitoring activities and negotiate incentive contracts with innovators. Monitoring intensity is determined endogenously as a function of factor prices and determines the risk premium required by risk-averse researchers. Natural forward and backward links arise between finance and innovation. By allowing for better risk sharing, closer monitoring yields a higher level of innovative activity in equilibrium and faster growth. Under plausible assumptions, the resulting changes in factor prices lower the relative cost of monitoring, leading to a further increase in the efficiency of the financial sector.
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  • de la Fuente, Angel & Marin, JoseMaria, 1996. "Innovation, bank monitoring, and endogenous financial development," Journal of Monetary Economics, Elsevier, vol. 38(2), pages 269-301, October.
    • Handle: RePEc:eee:moneco:v:38:y:1996:i:2:p:269-301
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    More about this item

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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