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Capital, Ideas, and the Costs of Financial Frictions
We study the role of financial frictions in determining the allocation of investment and innovation. Empirically, we find that established firms are investment-intensive when they have low net worth but become innovation-intensive as they accumulate net worth. To interpret these findings, we develop an endogenous growth model with heterogeneous firms and financial frictions. In our model, firms are investment-intensive when they have low net worth because their returns to capital are high. Financial frictions determine the rate at which firms drive down the returns to capital and shift towards innovation. Quantitatively, the aggregate losses due to lower innovation are large, even though the allocation of capital to existing ideas is comparatively efficient. If innovation has positive spillovers, a planner would lower investment among constrained firms to finance more innovation. An innovation subsidy does not generate the correct distribution of investment and innovation to exactly decentralize this outcome.
Date:
27 May 2025, 13:15
Venue:
Manor Road Building, Manor Road OX1 3UQ
Venue Details:
Seminar Room A
Speaker:
Pablo Ottonello (University of Maryland)
Organising department:
Department of Economics
Part of:
Macroeconomics Seminar
Booking required?:
Not required
Audience:
Members of the University only
Editor:
Edward Valenzano
