Abstract
This paper develops an endogenous directed technical change growth model with financial intermediation. Technical change is driven by R&D investments of private agents in response to market incentives and can take different directions. Key feature is that innovators are capital constrained and need external funds to finance R&D effort. Financial intermediaries finance these ventures. The main theoretical result shows that credit interest rates—a “risk effect”—add to the determinants of directed technical change: Beside the price and the market size effect, the risk effect encourages innovations in those sectors, where the risk of innovation failure is lower. The degree of substitutability regulates the power of these different effects and determines how innovations respond to changes in relative factor supply, given that the risk effect is an additional determinant of directed technical change.
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