TY  - JOUR
AU  - Michalopoulos,Stelios
AU  - Laeven,Luc
AU  - Levine,Ross
TI  - Financial Innovation and Endogenous Growth
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 15356
PY  - 2009
Y2  - September 2009
UR  - http://www.nber.org/papers/w15356
L1  - http://www.nber.org/papers/w15356.pdf
N1  - Author contact info:
Stelios Michalopoulos
Brown University
Department of Economics
E-Mail: smichalo@brown.edu

Luc Laeven
Senior Economist
International Monetary Fund
700 19th Avenue, NW
Washington, DC 20431
Tel: 202/623-9020
Fax: 202/623-4740
E-Mail: Llaeven@imf.org

Ross Levine
Department of Economics
Brown University
64 Waterman Street
Providence, RI 02912
Tel: 401/863-2170
E-Mail: ross_levine@brown.edu
AB  - We model technological and financial innovation as reflecting the decisions of profit maximizing agents and explore the implications for economic growth. We start with a Schumpeterian endogenous growth model where entrepreneurs earn monopoly profits by inventing better goods and financiers arise to screen entrepreneurs. A novel feature of the model is that financiers also engage in the costly, risky, and potentially profitable process of innovation: Financiers can invent more effective processes for screening entrepreneurs. Every existing screening process, however, becomes less effective as technology advances. Consequently, technological innovation and, thus, economic growth stop unless financiers continually innovate. Historical observations and empirical evidence are more consistent with this dynamic model of financial innovation and endogenous growth than with existing models of financial development and growth.
ER  -