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Liquidity, innovation, and endogenous growth

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  • Malamud, Semyon
  • Zucchi, Francesca

Abstract

We study optimal liquidity management, innovation, and production decisions for a continuum of firms facing financing frictions and the threat of creative destruction. We show that financing constraints lead firms to decrease production but may spur investment in innovation (R&D). We characterize which firms should substitute production for innovation in the face of constraints and thus display a "gambling" type of behavior. We embed our firm dynamics into a model of endogenous growth and show that financing frictions have offsetting effects on economic growth. JEL Classification: D21, G31, G32, G35, L11

Suggested Citation

  • Malamud, Semyon & Zucchi, Francesca, 2016. "Liquidity, innovation, and endogenous growth," Working Paper Series 1919, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20161919
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    References listed on IDEAS

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    16. Begenau, Juliane & Palazzo, Berardino, 2021. "Firm selection and corporate cash holdings," Journal of Financial Economics, Elsevier, vol. 139(3), pages 697-718.
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    Cited by:

    1. Begenau, Juliane & Palazzo, Berardino, 2021. "Firm selection and corporate cash holdings," Journal of Financial Economics, Elsevier, vol. 139(3), pages 697-718.
    2. Aladino Fernandez-Blanco & Joaquin Villanueva-Balsera & Vicente Rodriguez-Montequin & Henar Moran-Palacios, 2020. "Key Factors for Project Crowdfunding Success: An Empirical Study," Sustainability, MDPI, vol. 12(2), pages 1-19, January.
    3. Roberto Bonfatti & Luis A. Bryce Campodonico & Luigi Pisano, 2018. "Reconciling the original Schumpeterian Model with the observed inverted-U relationship between competition and innovation," Discussion Papers 2018-03, University of Nottingham, GEP.

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    More about this item

    Keywords

    cash management; Endogenous Growth; financial constraints; innovation;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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