DP2128 Competition, Financial Discipline and Growth

Author(s): Philippe Aghion , Mathias Dewatripont , Patrick Rey

Publication Date: April 1999

Keyword(s): Bankruptcy , Competition , Financial Discipline , Growth

JEL(s): E0 , L0 , O0

Programme Areas: Financial Economics , Industrial Organization

Link to this Page: www.cepr.org/pubs/dps/DP2128.asp

This paper develops a general equilibrium model of technological adoption in an economy populated by 'satisficing' entrepreneurs whose main objective is to minimise innovative effort while keeping the firm alive. In such an economy, product market competition is shown to have a stimulating effect on growth. Indeed, by reducing the amount of slack a manager can afford while keeping his firm alive, competition, combined with the threat of liquidation acts as a disciplinary device which fosters technology adoption and therefore growth. We then investigate how the existence of financial markets affects the importance of this growth-enhancing effect of competition.