Entrepreneurial Finance and Economic Growth

This paper incorporates the process of entrepreneurial finance into an endogenous growth model with horizontal innovation (Romer J Polit Econ 98:S71– S102, 1990; Jones J Polit Econ 103(4):759–784, 1995b). To capture the market frictions existing in the financing of innovation, entrepreneurial finance is described as a process of “search and matching” between entrepreneurs proposing their innovative ventures and capitalists selecting and financing the most valuable projects. We determine the amount of resources devoted to innovation along the balanced growth path. The welfare analysis highlights the sub-optimality of the equilibrium innovative efforts due to search and bargaining frictions.We analyze the role of the policy maker to restore the optimality of investments in innovation.