DP10840 Liquidity, Innovation, and Endogenous Growth
|Author(s):||Semyon Malamud, Francesca Zucchi|
|Publication Date:||September 2015|
|Keyword(s):||Cash management, Creative destruction, Endogenous growth, Financial constraints, Innovation|
|JEL(s):||D21, G31, G32, G35, L11|
|Programme Areas:||Financial Economics, Macroeconomics and Growth|
|Link to this Page:||www.cepr.org/active/publications/discussion_papers/dp.php?dpno=10840|
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 liquidity constraints unambiguously lead firms to decrease their production rate but, surprisingly, may spur investment in innovation (R&D). Using the model, we characterize which firms substitute production for innovation when constrained and thus display a non-monotonic relation between cash reserves and R&D. We embed our single-firm dynamics in a Schumpeterian model of endogenous growth and demonstrate that financing frictions have an ambiguous effect on economic growth.