Financial Risks and Research Contracts in a Model of Endogenous Growth


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.

Keywords: Endogenous Growth, R&D, Incomplete Contracts, Financial Imperfections
JEL Classification: O16

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