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FINANCIAL INTERMEDIATION IN A MODEL OF GROWTH THROUGH CREATIVE DESTRUCTION

Published online by Cambridge University Press:  25 March 2003

María F. Morales
María F. Morales
Affiliation:
Universidad Autónoma de Barcelona and Universidad de Murcia
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Abstract

This paper presents an endogenous growth model in which the research activity is financed by intermediaries that are able to reduce the incidence of researcher's moral hazard. It is shown that financial activity is growth promoting because it increases research productivity. It is also found that a subsidy to the financial sector may have larger growth effects than a direct subsidy to research. Moreover, because of the presence of moral hazard, increasing the subsidy rate to R&D may reduce the growth rate. I show that there exists a negative relation between the financing of innovation and the process of capital accumulation. Concerning welfare, the presence of two externalities of opposite sign stemming from financial activity may cause the no-tax equilibrium to provide an inefficient level of financial services. Thus, policies oriented to balance the effects of the two externalities will be welfare improving.

Keywords

Endogenous GrowthFinancial IntermediationResearch ActivityResearch Policy
Type
Research Article
Information
Macroeconomic Dynamics , Volume 7 , Issue 3 , June 2003 , pp. 363 - 393
Copyright
© 2003 Cambridge University Press

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