DP2128 Competition, Financial Discipline and Growth

Author(s): Philippe Aghion, Mathias Dewatripont, Patrick Rey
Publication Date: April 1999
Keyword(s): Bankruptcy, Competition, Financial Discipline, Growth
JEL(s): E0, L0, O0
Programme Areas: Financial Economics, Industrial Organization
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=2128

This paper develops a general equilibrium model of technological adoption in an economy populated by 'satisficing' entrepreneurs whose main objective is to minimise innovative effort while keeping the firm alive. In such an economy, product market competition is shown to have a stimulating effect on growth. Indeed, by reducing the amount of slack a manager can afford while keeping his firm alive, competition, combined with the threat of liquidation acts as a disciplinary device which fosters technology adoption and therefore growth. We then investigate how the existence of financial markets affects the importance of this growth-enhancing effect of competition.