Competition, Financial Discipline and Growth (Q4939348)

The main purpose of the paper is to introduce agency considerations in a model of innovation and growth and, more specifically, to analyze the incentive effects of product market competition and financial market discipline on steady-state growth in a dynamic model with non profit-maximizing firms. The Darwinian view of competition is supported by recent empirical evidence, pointing at a positive correlation between competition and productivity growth within a firm or industry. In contrast, the Schumpeterian view stresses that it is the existence of future monopoly rents that induces firms to innovate and thereby the economy to grow. Section 2 of the paper develops a general equilibrium model of technological adaption, where intermediate producers have to incur a fixed cost to adopt the latest (i.e. lowest marginal cost) production technology. Sections 3 and 4 show that, for profit-maximizing firms, the Schumpeterian argument works and competition deters adoption and growth. Instead, if the economy is populated by firms controlled by ``conservative'' entrepreneurs (whose sole desire is to delay adoption of new technologies while keeping the firm alive), competition acts as a discipline device which fosters technology adoption and growth. Sections 5 and 6 investigate how the existence of financial markets effects the importance of the Darwinian argument. Section 5 shows that when outstanding debt claims cannot be renegociated or diluted ex post, and in the absence of uncertainty on the result of adoptions, then the steady-state conservative entrepreneurs should have accumulated just enough debt to force them to behave exactly as profit-maximizers. Section 6 introduces uncertainty on the probability of adoptions, which limits the power of debt as a discipline device on non profit-maximizing managers. In contrast to section 5, credit markets do not eliminate all slack, and product market competition has the potential again to reduce slack and thereby to speed up technological adoptions. However, the authors show also that the main side effect of product market competition is to crowd out at least partially the positive contribution of financial discipline on adoption and growth, restoring somehow the original Schumpeterian trade-off between competition and growth.