Access to Finance, Product Innovation and Middle-Income Traps

This paper studies interactions between access to finance, product innovation, and labor supply in a two-period overlapping generations model with an endogenous skill distribution and credit market frictions. In the model lack of access to finance (induced by high monitoring costs) has an adverse effect on innovation activity not only directly but also indirectly, because too few individuals may choose to invest in skills. If monitoring costs fall with the number of successful projects, multiple equilibria may emerge, one of which, a middle-income trap, characterized by low wages in the design sector, a low share of the labor force engaged in innovation activity, and low growth. A sufficiently ambitious policy aimed at alleviating constraints on access to finance by innovators may allow a country to move away from such a trap by promoting the production of ideas and improving incentives to invest in skills.

Bibliographic Details

Main Authors:	Agénor, Pierre-Richard, Canuto, Otaviano
Language:	English en_US
Published:	World Bank, Washington, DC 2014-02
Subjects:	ACCESS TO EXTERNAL FINANCE, ACCESS TO FINANCE, ACCOUNTING, ADVERSE EFFECT, AGENCY PROBLEMS, AGGREGATE DEMAND, AGGREGATE DEMAND CURVE, ARBITRAGE, ASYMMETRIC INFORMATION, AVAILABILITY OF FINANCE, BANK CREDIT, BANK LOAN, BANK MONITORING, BANK POLICY, BANKRUPTCY, BANKS, BORROWER, BORROWING, BUDGET CONSTRAINT, BUDGET CONSTRAINTS, BUSINESS CYCLE, CAPITAL GAINS, CAPITAL INVESTMENT, CAPITAL MARKETS, CAPITAL STOCK, CASH FLOWS, CASH RESERVES, COLLATERAL, CONSTRAINTS ON ACCESS, CONTRACTUAL ARRANGEMENTS, CONTRACTUAL RELATIONSHIP, COST OF LOANS, CREDIT BUREAUS, CREDIT CONSTRAINTS, CREDIT HISTORIES, CREDIT MARKET, CREDITOR, CREDITORS, DEBT, DEBT FINANCE, DEVELOPING COUNTRIES, DEVELOPMENT BANK, DEVELOPMENT ECONOMICS, DEVELOPMENT OF INNOVATION, DEVELOPMENT POLICY, DISCOUNT RATE, DIVERSIFIED PORTFOLIO, DOMESTIC MARKETS, EARNINGS, ECONOMIC DEVELOPMENT, ECONOMIC GROWTH, ECONOMIC PERFORMANCE, ECONOMIC POLICY, ECONOMIC RESEARCH, ELASTICITY OF SUBSTITUTION, EMERGING MARKETS, EMPLOYMENT, ENTREPRENEURIAL ACTIVITIES, ENTREPRENEURS, ENTREPRENEURSHIP, EQUALITY, EQUILIBRIUM, EQUITY FINANCE, EQUITY FUND, EQUITY FUNDS, EQUITY MARKET, EQUITY MARKET DEVELOPMENT, EXTERNAL CAPITAL, EXTERNAL FINANCE, EXTERNAL FINANCING, EXTERNALITIES, EXTERNALITY, FEDERAL RESERVE, FINANCE CONSTRAINTS, FINANCIAL ACCESS, FINANCIAL DEVELOPMENT, FINANCIAL INNOVATION, FINANCIAL INTERMEDIARIES, FINANCIAL INTERMEDIARY, FINANCIAL INTERMEDIATION, FINANCIAL LIBERALIZATION, FINANCIAL MARKET, FINANCIAL MARKETS, FINANCIAL SECTOR, FINANCIAL SERVICES, FINANCIAL SYSTEM, FINANCIAL SYSTEMS, FIXED COST, FIXED COSTS, FORMAL ANALYSIS, FRAUD, FUNDING SOURCES, GDP, GOVERNMENT INTERVENTION, GOVERNMENT SUBSIDIES, GROUP OF FIRMS, GROWTH POTENTIAL, GROWTH RATE, HOLDING, HOUSEHOLDS, HUMAN CAPITAL, HUMAN CAPITAL DEVELOPMENT, IMPERFECT COMPETITION, INCOME, INCOME GROWTH, INCREASING RETURNS, INEQUALITY, INFORMATION ASYMMETRIES, INFORMATION ASYMMETRY, INNOVATION, INNOVATIONS, INPUT PRICES, INTANGIBLE, INTELLECTUAL PROPERTY, INTEREST RATE, INTERNAL FUNDS, INTERNATIONAL BANK, INTERNATIONAL ECONOMICS, INTERNATIONAL FINANCE, INVESTING, JOB CREATION, LABOR FORCE, LABOR MARKET, LABOR PRODUCTIVITY, LABOR SUPPLY, LACK OF ACCESS, LACK OF COLLATERAL, LACK OF FINANCE, LAWS, LEGAL CONSTRAINTS, LENDER, LENDERS, LEVY, LIMITED LIABILITY, LIQUIDITY, LOAN, LOAN CONTRACT, LOAN CONTRACTS, LOAN RATE, MACROECONOMICS, MARGINAL COST, MARGINAL PROPENSITY TO SAVE, MARGINAL REVENUE, MARKET CAPITALIZATION, MARKET DEVELOPMENT, MARKET DISTORTIONS, MONETARY FUND, MONITORING COSTS, MONOPOLISTIC COMPETITION, MONOPOLY, MORAL HAZARD, MULTIPLE EQUILIBRIA, NEW ENTRANTS, OPPORTUNITY COST, OVERLAPPING GENERATIONS MODEL, PATENTS, PHYSICAL ASSETS, PHYSICAL CAPITAL, POLITICAL ECONOMY, POOR ACCESS, PRICE ELASTICITY, PRICE ELASTICITY OF DEMAND, PRIVATE EQUITY, PRIVATE FINANCE, PRIVATE SECTOR CREDIT, PRODUCTION COSTS, PRODUCTION FUNCTION, PRODUCTION INPUTS, PRODUCTIVITY, PROFITABILITY, PROPERTY RIGHTS, PROVISION OF LOANS, PUBLIC POLICY, RATE OF RETURN, RATES OF RETURN, RETURNS, RISK AVERSION, RISK CAPITAL, SAVINGS, SAVINGS RATE, SKILLED WORKERS, SMALL ENTERPRISES, SOURCE OF INCOME, SOURCES OF FINANCE, START-UPS, STOCK MARKET, STOCK MARKET DEVELOPMENT, STOCKS, TAX, TAX INCENTIVES, TAX RATE, TELECOMMUNICATIONS, TRANSACTION, TRANSACTION COSTS, UNSKILLED LABOR, UNSKILLED WORKERS, UTILITY FUNCTION, VENTURE CAPITAL, VENTURE CAPITAL INVESTMENT, VENTURE CAPITALISTS, WAGES, WEALTH,
Online Access:	http://documents.worldbank.org/curated/en/2014/02/18900889/access-finance-product-innovation-middle-income-traps https://hdl.handle.net/10986/17307
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