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Liquidity, innovation, and endogenous growth

Semyon Malamud, Francesca Zucchi, (2016), “Liquidity, innovation, and endogenous growth”, ECB Working Paper 1919, Ιούνιος
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.

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