Title
Financial Risks and Research Contracts in a Model of Endogenous Growth
Abstract
This paper examines researchers' choices between either collaborating with venture
capitalists (Regime C) or going independently (Regime I), and how their interaction
affects long-run endogenous growth, in an economy characterized by incomplete
contracts and financial market imperfections. Both research and production require
labor and physical capital. We find that an improvement in financial regulation leads
to a higher rate of innovation under Regime I. In contrast, an improvement in R&D
incentives for researchers in Regime C can coincide with either an increase or a decrease
in the long-run rate of innovation, due to the holdup problem in post bargaining
over created value. We also rank the growth rates in the two regimes under different
contractual and financial environments. Finally, we find that conflicts can arise when
entrepreneurs choose one regime based on investment incentives but the other regime
provides a higher growth rate.
Colin DAVIS
Faculty of Economics, Kobe University
Laixun ZHAO
Research Institute for Economics and Business Administration
Kobe University
Rokkodai-cho, Nada-ku, Kobe
657-8501
Japan
Phone: (81) 78 803 7036
Fax: (81) 78 803 7059