“Deep Pockets”, Research and Development Persistence and Economic Growth

This paper studies endogenous growth driven by an expanding variety of product where lenders limit credit up to the collateralizable value of existing patents. Due to R&D investment risk, there is a composition effect between innovative firms currently contrained and innovative firms anticipating future contraints (hence accumulating current profit and decreasing current debt). Re-sults are: (i) patent behaviour is lumpy and show some persistence; (ii) the steady state aggregate debt/patent ratio is below the leverage ceiling due to the composition of current versus future financial constraints; (iii) this debt/patent ratio determines a leverage driven steady state growth of the economy