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A Schumpeterian growth model on the effect of development banking on growth

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  • Reynaldo Senra Hodelin

    (Centro de Investigaciones de la Economia Mundial)

Abstract

Research and Development activities are very credit constrained in several poor nations with weak institutions. To curb the financial barrier, governments apply development banking policies. A common one is the subsidization of private banks in order for them to increase the loans for Research and Development. This article analyzes the implication of this policy for economic growth, when it is financed with taxes on old successful entrepreneurs and, at the beginning, the financial market for research loans was completely depressed due to a moral hazard problem and the low quality of the institutions. I found that regardless of the magnitude of the tax rate, a minimum level of quality of the institutions is required for the achievement of any success. Interestingly, if there is a range of tax boosting productivity, it may be very tight and this points at the relevance of the proper design of the development banking policies. Finally, even if this policy can boost the technological level of a poor economy, it is not possible to achieve convergence with leading economies and any positive implication for the welfare of the entrepreneurs is not granted.

Suggested Citation

  • 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.
    • Handle: RePEc:kap:ecopln:v:55:y:2022:i:2:d:10.1007_s10644-021-09324-w
    DOI: 10.1007/s10644-021-09324-w
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