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Distance to Frontier and Optimal Financial Structure

2020-05-04

Content introduction:

No. E2020005

Distance to Frontier and Optimal Financial Structure

 

Justin Yifu Lin, Wei Wang, Venite Zhaoyang Xu

March 7, 2020

 

 

Abstract:


This paper studies endogenous change of financial institutions in a Schumpeterian endogenous growth model with uncertain innovation outcome. The market financing system has comparative advantage in promoting efficiency of invention while intermediary financial institution has comparative advantage in facilitating imitation. When the economy is at early stages of economic development, imitation is more important and the intermediary financial institution emerges in equilibrium. As the economy approaches the world technology frontier, invention becomes more essential and hence the financial institution will gradually switch to the market financing system.

 

Keywords: distance to frontier; diversity of opinion; financial institutions; Schumpeterian growth model; comparative advantage

 

JEL Classification: E22, G14, G21, L16, O31, O33, O4.

 

The series of New Structural Economics Working Papers aims to encourage academic scholars and students from all over the world to conduct academic research in the field of new structural economics. Excellent papers are selected irregularly and are offered academic suggestions and recommendation, but the published working papers are not intended to represent official communication from INSE.