nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2023‒02‒27
twenty papers chosen by
Georg Man

  1. Capital Deaccumulation and the Large Persistent Effects of Financial Crises By Matthew Knowles
  2. The highs and the lows: Bank failures in Sweden through inflation and deflation, 1914-1926 By Kenny, Sean; Ögren, Anders; Zhao, Liang
  3. Debt Finance and Economic Activity in the Euro-Area: Evidence on Asymmetric and Maturity Effects By Kuntal K Das; Logan J Donald; Alfred V Guender
  4. Short-term Finance, Long-term Effects: Theory and Evidence from Morocco By Kenza Benhima; Omar Chafik; Min Fang; Wenxia Tang
  5. Zombie Lending, Labor Hoarding, and Local Industry Growth By Kin Wai Cheung; Masami Imai
  6. Interbank network and banks' credit supply By Covi, Giovanni; Gu, Xian
  7. India's credit landscape in a post-pandemic world By Rajeswari Sengupta; Harsh Vardhan
  8. Financial Inclusion Measurement: Deepening the Evidence By Indradeep Ghosh; Susan Thomas
  9. Migrant Remittances, Agriculture Investment and Cropping Patterns By Ali Ubaid; Mazhar Mughal; Lionel de Boisdeffre
  10. Remittances in times of crisis: evidence from Italian corridors By Alessio Ciarlone
  11. Private Savings and COVID-19 in Sub-Saharan Africa By Mr. Boileau Loko; Mr. Marcos Poplawski Ribeiro; Nelie Nembot
  12. Rentiers, Strategic Public Goods and Financialization in the Periphery By Gabriel Porcile; Gilberto Tadeu Lima
  13. The Fear Economy: A Theory of Output, Interest, and Safe Assets By Ruchir Agarwal
  14. Understanding Monetary Policy:The Real Sector and Welfare By Marcella Lucchetta
  15. Leverage and Time-Varying Effects of Monetary Policy on the Stock Market By Severin Bernhard; Philip Vermeulen
  16. U.S. Monetary Policy Shock Spillovers: Evidence from Firm-Level Data By Davide Furceri; Ms. Elif C Arbatli Saxegaard; Jeanne Verrier; Melih Firat
  17. Shock Absorbers or Transmitters? The Role of Foreign Banks during COVID-19 By Juan Yepez; Weijia Yao; Anamika Sen
  18. Bank Market Power and Interest Rate Setting: Why Consolidated Banking Data Matte By Théo Nicolas.
  19. The collection of slavery compensation, 1835-43 By Anson, Michael; Bennett, Michael D.
  20. Financing Innovation with Innovation By Zhiyuan Chen; Minjie Deng; Min Fang

  1. By: Matthew Knowles (University of Cologne)
    Abstract: In a panel of OECD and emerging economies, I find that recessions are associated with larger initial drops in investment and more persistent drops in output if they occur simultaneously with banking crises. Furthermore, the banking crises that are followed by more persistent output slumps are associated with particularly large initial drops in investment. I show that these patterns can arise in a model where a financial shock temporarily increases the costs of external finance for investing entrepreneurs. This leads to a drop in investment and a very persistent slump in output and employment, provided wages are sufficiently rigid. Critical to the model is the distinction between different types of capital with different depreciation rates. Intangible capital and equipment have high depreciation rates, leading these stocks to drop substantially when investment falls after a financial shock. I find that this mechanism can account for almost a third of the persistent drop in output and employment in the US Great Recession (2007-2014).
    Keywords: Financial Shocks, Great Recession, Persistent Slumps, Intangible Capital.
    JEL: E22 E32 E44
    Date: 2023–02
  2. By: Kenny, Sean; Ögren, Anders; Zhao, Liang
    Abstract: This paper revisits the Swedish banking crisis (1919-26) that materialized as post war deflation replaced wartime inflation (1914-18). Inspired by Fisher's 'debt deflation theory', we employ survival analysis to 'predict' which banks would fail, given certain ex-ante bank characteristics. Our tests support the theory; maturity structures mattered most in a regime of falling prices, with vulnerable shorter-term customer loans and bank liabilities representing the most consistent cause of bank distress in the crisis. Similarly, stronger growth in i) leverage, ii) weaker collateral loans and iii) foreign borrowing during the boom were all associated with bank failure in post-war Sweden (1919-26).
    Keywords: banking crisis, survival analysis, early warning indicators, debt deflation, maturity mismatch, Sweden
    JEL: E58 G01 G21 G28 N24
    Date: 2023
  3. By: Kuntal K Das; Logan J Donald; Alfred V Guender
    Abstract: This paper presents a model of alternative sources of credit – bank vs. bond finance - to examine the credit substitution hypothesis. Our framework produces testable hypotheses about the behaviour of price- and quantity-based information variables. Examining data from ten Euro-area countries, we find that a credit spread outperforms a finance mix as a predictor of economic activity in both time series and pooled data regressions. There are clear signs of asymmetric and maturity effects in the data. Positive changes in the credit spread predict decreases in economic activity while negative changes bear no informative content. The asymmetric effect is exceptionally strong in pooled data and is present in short-term, long-term, and total credit spreads. In country-specific time-series regressions the asymmetric signalling property is strongest for the long-term credit spread. By contrast, we find no substantive evidence that changes in a quantity-based finance mix have robust predictive power.
    Keywords: Credit spread, finance mix, predictive ability, asymmetric effects, maturity split
    JEL: E3 E4 G1
    Date: 2023–02
  4. By: Kenza Benhima (Department of Economics, University of Lausanne); Omar Chafik (Bank Al-Maghrib); Min Fang (Department of Economics, University of Florida); Wenxia Tang (Department of Economics, University of Lausanne)
    Abstract: We study the effect of working capital loan guarantee programs on firm growth and their aggregate implications. Using a Moroccan firm-level dataset, we show that firms with guaranteed short-term loans (i) decrease their cash ratio, (ii) expand their production scale homogeneously and persistently, and that (iii) participation in the guarantee program is humped- shaped in firm size. We rationalize these findings in a heterogeneous-firm model with collateral and working capital constraints. First, we show that while relaxing collateral constraints on short-term loans always has a positive short-term effect on firm growth as firms reallocate cash to capital, persistent effects on firm scale depend on the existence and size of intertemporal distortions. Second, the combination of a flat fixed participation cost and size-dependent collateral constraints explain the non-monotonous participation rate. The interaction of the collateral constraint with these two frictions is crucial to determine the aggregate effect of a loan guarantee program. We parameterize the model to our Moroccan firm-level data. We show that the growth and welfare gains of expanding credit guarantee programs through a higher guaranteed amount or a lower participation cost are substantial, with the former generating relatively more growth while also increasing participation.
    JEL: E22 E27 E44 G28 G38
    Date: 2022–05
  5. By: Kin Wai Cheung (Department of Economics, University of California, Davis); Masami Imai (Department of Economics, Wesleyan University)
    Abstract: After the bursting of real estate bubbles in 1991, Japanese banks continued lending to the construction and real estate sectors to conceal problem loans. We revisit Japan’s experience and propose a new mechanism via which banks’ loan-evergreening policy for these troubled sectors undermines allocative efficiency. Namely, banks’ support for the construction and real estate sectors encourages labor hoarding in unviable construction projects. Since construction projects predominantly use low-skilled workers, banks’ loan-evergreening policy may depress other low-skilled industries. Based on the industry-level data in each of Japan’s 47 prefectures from 1992-1996, we document empirical facts consistent with this hypothesis. On average, lowskilled industries experienced disproportionately slower output and employment growth and more sluggish growth in the number of new establishments in prefectures where the share of bank loans to local construction/real estate sectors increased more after construction boom ended.
    Date: 2023–01
  6. By: Covi, Giovanni (Bank of England); Gu, Xian (Durham University Business School)
    Abstract: This paper examines how the interbank network structure influences banks’ credit supply to the real economy. Using the dynamic UK interbank networks based on the quarterly evolutions of bilateral exposures from 2014 to 2021, we find evidence of both risk-sharing effect through the interbank core-periphery structure and liquidity-insurance effect within interbank lending communities. Core banks with high global centrality and banks in a larger community tend to lend more to non-financial firms. The effect of global centrality is still significant after controlling for the local effects including local centrality and community size. During the Covid-19 pandemic, the effect of risk sharing is mitigated whereas the effect of community lending is strengthened.
    Keywords: Interbank network; centrality; community; bank loans; Covid-19
    JEL: G20 G21 L14
    Date: 2022–11–18
  7. By: Rajeswari Sengupta (Indira Gandhi Institute of Development Research); Harsh Vardhan
    Abstract: In this paper we study the impact of the Covid-19 pandemic on the financial sector of the Indian economy, specifically on the banking sector, the non-banking finance companies (NBFCs) and the bond market, for the period March 2020 to March 2022. In order to set the context, we first summarise the conditions of the financial sector in the pre-pandemic period. We highlight the long-term structural trends and their underlying drivers that were conspicuous in this sector even before the pandemic. These issues have direct consequences for the manner in which the pandemic impacted the financial sector which is what we discuss next. Finally, we describe the way forward for the Indian credit landscape in terms of the major opportunities and challenges.
    Keywords: Banking sector, Credit ecosystem, Pandemic, Consumer credit, Bond market
    JEL: G21 G23 G28
    Date: 2022–12
  8. By: Indradeep Ghosh (Dvara Research); Susan Thomas (xKDR Forum)
    Abstract: The widely accepted view that finance is important to improve the lives of individuals has led to a tenacious policy support for financial inclusion. The term itself has evolved with time, and along with it, the approaches to measure financial inclusion. This paper in the 17th edition of the Inclusive Finance India Report ( describes the evolution of financial inclusion in India and the various strategies used to quantify so far. The paper presents new thinking on measuring financial inclusion, including the latest Findex measure from the World Bank and the holistic input-output-outcome approach by Dvara Research and XKDR Forum. While both approaches depend upon household surveys, the paper identifies gaps between the measurement focus of the Findex, which continues to focus on bank accounts and payment systems, and the Dvara-XKDR approach which incorporates a greater coverage of what the household holds as financial instruments, how they are used and the perceived well-being of households that are more financially included. The evidence presented suggests that the input-output-outcome can be more useful to both policy makers and financial service providers in identifying households that are financially less included.
    JEL: D1 G2 G5
    Date: 2023–01
  9. By: Ali Ubaid (TREE - Transitions Energétiques et Environnementales - UPPA - Université de Pau et des Pays de l'Adour - CNRS - Centre National de la Recherche Scientifique); Mazhar Mughal (TREE - Transitions Energétiques et Environnementales - UPPA - Université de Pau et des Pays de l'Adour - CNRS - Centre National de la Recherche Scientifique, ESC PAU - Ecole Supérieure de Commerce, Pau Business School); Lionel de Boisdeffre (Institut national de la statistique et des études économiques (INSEE))
    Abstract: This study investigates how the receipt and amount of domestic or international transfers influences household decisions regarding farm investment and the selection of capital and labor-intensive crops. We develop a conceptual framework to postulate that even though recipient households may have the possibility to employ the additional income to raise their agricultural investment, the investment falls in the short run if labor constraints arising from the migrant member's absence are binding and capital accumulation is suboptimal. Employing a set of endogenous treatment estimations, we empirically test this hypothesis on data on 5, 636 rural households from Pakistan. Our findings show a substantial difference between recipient and nonrecipient households in terms of their economic behavior. Recipient households make 99.64% less agricultural investment and obtain 82% less production compared to non-recipient households. The estimates are found to be robust when tested with alternate empirical techniques Heckman Selection and matching. The impact is stronger in case of households which receive domestic transfers, with 99.87% less farm investment and 77% less production than non-recipient households. Remittances result in a decrease in production of both capitaland labor-intensive crops, reflecting a decline in overall farm activity. Similar farm investment and cropping patterns are observed relative to the amount of remittances received. The results are robust to different model specifications and estimation procedures.
    Keywords: Migration Remittances Agriculture Investment Cropping Patterns Instrumental Variable PSM., Migration, Remittances, Agriculture Investment, Cropping Patterns, Instrumental Variable
    Date: 2023–01–09
  10. By: Alessio Ciarlone (Banca d'Italia)
    Abstract: Defying expectations, remittance flows to low- and middle-income countries withstood the shock related to the outbreak of the COVID-19 pandemic. Relying on detailed data for a large panel of remittance-receiving economies, this paper explores the key drivers of remittance outflows from Italy and finds empirical support to plausible explanations for their resilience during the pandemic. The impulse response functions obtained via a local projection approach confirm the paramount role of remittances as automatic stabilizers. Notwithstanding a reduction in their personal incomes due to the recession in Italy, migrant workers stepped up their financial support to their families back home to cushion the impact of the pandemic. In this regard, a shift from informal to formal remittance channels played a significant role. More specifically, the acceleration in the digitalization of financial services during, and because of, the pandemic had important spillover effects on migrants’ remittances, thus overcoming the hurdles created by the COVID-related restrictions adopted in both the sending and the receiving countries.
    Keywords: Remittances, COVID-19, local projections, digitalisation, mobile money, informality
    JEL: F24 I10 O11
    Date: 2023–02
  11. By: Mr. Boileau Loko; Mr. Marcos Poplawski Ribeiro; Nelie Nembot
    Abstract: The paper reexamines the main private savings determinants in Sub-Saharan Africa (SSA), followed by an analysis of the COVID-19 pandemic impact on private savings in SSA and other country groupings. Using an unbalanced panel data from 1983−2021 for 31 SSA economies, the paper finds that real per capita economic growth remains a key historical determinant of private savings in the region. In contrast with other regions, private saving rates have not increased during COVID-19 in SSA. Instead, COVID-19 deaths in our estimations are significantly associated with a decline in private savings in SSA. Robustness checks and a descriptive analysis of household surveys during the pandemic corroborate those results.
    Keywords: Private Savings; Sub-Saharan Africa; COVID-19; Economic Growth; savings determinants in SSA; pandemic impact; preventive measure; SSA economy; robustness check; Income; Estimation techniques; Middle East; North Africa
    Date: 2022–09–09
  12. By: Gabriel Porcile; Gilberto Tadeu Lima
    Abstract: This paper revisits a traditional theme in the literature on the political economy of development, namely how to redistribute rents from traditional exporters of natural resources towards capitalists in technology-intensive sectors that have a higher potential for innovation and the creation of higher-productivity jobs. We argue that this conflict has been reshaped in the past three decades by two major transformations in the international economy. The first is the acceleration of technical change and the key role governments play in supporting international competitiveness. This role takes the form of the provision of strategic public goods to foster innovation and the diffusion of technology (what Christopher Freeman called “technological infrastructure†). The second is the impact of financial globalization in limiting the ability of governments in the periphery to tax and/or issue debt to finance those public goods. Capital mobility allows exporters of natural resources to send their foreign exchange abroad to arbitrate between domestic and foreign assets, and to avoid taxation. Using a macroeconomic model for a small open economy, we argue that in this more complex international context the external constraint on output growth assumes different forms. We focus on two polar cases: the “pure financialization†case, in which legal and illegal capital flights prevent the government from financing the provision of strategic public goods; and the “trade deficit†case, in which private firms in the more technology-intensive sector cannot import the capital goods they need to expand industrial production.
    Keywords: Rentiers; public goods; financial globalization; technological infrastructure; center and periphery
    JEL: E12 F31 F63 H41 O11
    Date: 2023–01–30
  13. By: Ruchir Agarwal
    Abstract: This paper presents a fear theory of the economy, based on the interplay between fear of rare disasters and the interest rate on safe assets. To do this, I study the macroeconomic consequences of government-administered interest rates in the neoclassical real business cycle model. When the government has the power to fix the safe real interest rate, the gap between the `sticky real safe rate' and the `neutral rate' can generate far-reaching aggregate distortions. When fear exogenously rises, the demand for safe assets rise and the neutral rate falls. If the central bank does not lower the safe rate by the same amount, savings rise leading to a decline in consumption and aggregate demand. The same mechanism works in reverse, when fear falls. Quantitatively, I show that a single fear factor can simultaneously (i) generate cross-correlations in output, labor, consumption, and investment consistent with the postwar US economy; and (ii) generates variation in equity prices, bond prices, and a large risk premium in line with the asset pricing data. Six novel insights emerge from the model: (1) actively regulating the safe interest rate (in both directions) can mitigate the fluctuations generated by fear cycles; (2) recessions will be deeper and longer when central banks accept the zero lower bound and are unwilling to use negative rates; (3) a commitment to use negative rates in recessions—even if never implemented—raises both the short- and long-run real neutral rates, and moderates the business cycle; (4) counter-cyclical fiscal policy can act as disaster insurance and be expansionary by reducing fear; (5) quantitative easing can be narrowly effective only when fear is high at the lower bound; and (6) when fear is high, especially at the lower bound, policies that boost productivity also help fight recessions.
    Keywords: fear; business cycles; interest; safe assets; fear economy; government-administered interest rates; fear theory; business cycle model; fear factor; Output gap; Consumption; Zero lower bound; Interest rate floor; Yield curve; Global
    Date: 2022–09–09
  14. By: Marcella Lucchetta (Department of Economics, University Of Venice CÃ Foscari)
    Abstract: This paper shows theoretically the linkages among monetary policy rate, the real sector demand for loans with supply shocks, aggregate risks, and social welfare. We prove that a) when the loans’ demand is elastic bank competition and the policy rate decrease risks and increase the amount of lending to firms b) these effects are reinforced as the number of banks in the banking market raises. We provide theoretical support to the empirical findings that a competitive environment, or an elastic demand for investments, renders the monetary policy more effective and increases welfare (Aghion et al 2019), on the contrary, uncompetitive structures obtain opposite effects (Wang et all 2022). The policy implications are that the welfare maximizing policy rate can be lower it could be lower than set by the Central Bank when there is high inflation (Rogoff, 2017). c) As in this economic phase of perfect diversification difficulties because of aggregate risks, the policy rate is more effective in welfare increasing if the banking sector is competitive.
    Keywords: Monetary policy, bank competition, risk-taking and banking market structure, investment demand elasticity, aggregate risk and social welfare.
    JEL: G2 D4 D61
    Date: 2023
  15. By: Severin Bernhard; Philip Vermeulen
    Abstract: Using high-frequency identification, we investigate leverage of the firm and economy-wide leverage as determinants of the sensitivity of a firm's stock price to monetary policy announcements. We show that the effect of economy-wide leverage is substantially larger than the effect of the firm's own leverage. It is sufficient for the response of a firm's stock price to strengthen that other firms in the economy become more leveraged. We further show that economy-wide leverage fluctuations explain the time-varying effects of monetary policy on stock prices. Our results are robust controlling for a variety of common business cycle variables and household leverage.
    Keywords: Monetary policy, stock returns, leverage
    JEL: E44 E52 G14
    Date: 2023–01
  16. By: Davide Furceri; Ms. Elif C Arbatli Saxegaard; Jeanne Verrier; Melih Firat
    Abstract: We examine three main channels through which U.S. monetary policy shocks affect firm investment in foreign countries: (1) the balance sheet channel; (2) the financial channel of the exchange rate; and (3) the trade channel. For this purpose, we use quarterly firm-level data for 63 advanced economies (AEs) and emerging market and developing economies (EMDEs) over 1996-2016. Our results suggest an important and independent role for all three key channels. U.S. monetary policy shocks have larger effects on investment for firms that are more leveraged (balance sheet channel), for firms that have a higher share of debt in foreign currency (financial channel of the exchange rate), and for firms that operate in sectors with higher export dependence (trade channel). Back-of-the-envelope calculations suggest that the balance sheet channel is the most important channel of transmission of U.S. monetary policy shocks on aggregate firm investment.
    Keywords: U.S. monetary policy shocks; international spillovers; investment; firm heterogeneity.; shock spillover; balance sheet channel; spillover channel; trade channel; level data; Financial statements; Exchange rates; Spillovers; Exports; Exchange rate arrangements; Global
    Date: 2022–09–16
  17. By: Juan Yepez; Weijia Yao; Anamika Sen
    Abstract: This paper studies whether bank ownership influenced lending behavior during the COVID-19 shock. It finds that, similar to previous episodes of financial distress, foreign banks appear to have played a shock-transmitting role, as there was a sharp slowdown in lending by foreign banks’ affiliates relative to domestic banks. However, given the uniqueness of the COVID-19 shock and the impact of lockdowns on economic activity, foreign banks were found to lend at a higher rate than domestic banks once the stringency of mobility restrictions is accounted for, with their lending portfolio concentrated more in the corporate sector. Results also suggest that the difference in lending rates between foreign and domestic banks could be explained by the heterogeneous effects of policy measures in response to the pandemic. In jurisdictions with more stringent mobility restrictions, policy interventions actually encouraged higher lending by foreign banks. These findings suggest that foreign bank presence may have acted as a shock absorber in jurisdictions where economic activity was most affected by the pandemic.
    Keywords: Policy announcements; financial conditions; credit; ownership; capital; liquidity; COVID-19.; bank ownership; ownership data; bank behavior; bank characteristic; domestic bank; bank size; Foreign banks; COVID-19; Bank credit; Credit ratings; Global; Central America; Central and Eastern Europe
    Date: 2022–09–16
  18. By: Théo Nicolas.
    Abstract: The literature on the effects of bank market power on access to credit has produced many results that are sometimes contradictory. Yet, all of these studies are based on unconsolidated data that ignore the national market power of banking groups. This results in an underestimation bias that this paper proposes to correct. Using a panel of more than 55, 000 French firms covering the period 2006–2017, I consider a set of structural and non-structural measures of bank market power both at the unconsolidated and consolidated levels. My results strongly support the market power hypothesis which emphasizes the virtues of competition on interest rate setting. I find that bank market power increases the interest rate charged, but only when using my consolidated measures. This effect is stronger for small and risky firms and is concentrated on long-term loans. My findings highlight the need to take into account the capital linkages of subsidiaries within the same banking group in order to fully assess the implications of bank market power. Yet, the vices of greater bank market power need to be put into perspective with its costs and benefits on financial stability, which goes beyond the cost of this paper <p> La littérature sur l’effet du pouvoir de marché des banques sur l'accès au crédit des entreprises a abouti à des résultats parfois contradictoires. Toutefois, cet article montre que les mesures traditionnelles du pouvoir de marché des banques sont toutes problématiques car elles s’appuient sur des données non consolidées et ignorent par la même le pouvoir de marché national des groupes bancaires. Il en résulte une sous-estimation que je propose de corriger. En utilisant un panel de plus de 55 000 entreprises françaises couvrant la période 2006-2017, je considère un ensemble de mesures structurelles et non structurelles du pouvoir de marché des banques à la fois au niveau non consolidé et consolidé. Mes résultats corroborent l’hypothèse du pouvoir de marché bancaire qui met en avant les vertus de la concurrence sur la fixation des taux d'intérêt. Alors que les mesures non consolidées du pouvoir de marché des banques n'affectent pas le coût du crédit, je constate que les mesures consolidées augmentent le taux d'intérêt pratiqué. Cet effet est plus fort pour les petites entreprises et les entreprises risquées et se concentre sur les prêts à long terme. Ces résultats soulignent la nécessité de prendre en compte les liens capitalistiques des filiales issues d’un même groupe bancaire pour évaluer pleinement les implications du pouvoir de marché des banques. Les avantages d'un plus grand pouvoir de marché des banques doivent toutefois être mis en perspective avec les coûts et les avantages pour la stabilité financière, ce qui dépasse le cadre de cette recherche.
    Keywords: Cost of Credit, Bank Competition, Bank Concentration, Relationship Lending.; coût du crédit, compétition bancaire, concentration bancaire, relation bancaire
    JEL: E43 E51 G01 G21
    Date: 2023
  19. By: Anson, Michael (Bank of England); Bennett, Michael D. (University of Sheffield)
    Abstract: On 28 August 1833 Parliament passed legislation that abolished slavery within the British Empire, emancipating more than 800, 000 enslaved Africans. As part of the compromise that helped to secure abolition, the British government agreed a generous compensation package of £20 million to slave-owners for the loss of their ‘property’. The Bank of England administered the payment of slavery compensation on behalf of the British government. Using records held in the Bank’s Archive, a data set of 13, 500 unique transactions has been produced which details the collection of £3.4 million of compensation awarded in the form of government stock (3.5% Reduced Annuities). We shed new light on the compensation process by deploying this data set to analyse who actually held the Reduced Annuities in the books of the Bank of England, and for how long the stock was kept. While slave-owners were the main beneficiaries of the compensation process, our analysis shows that there were also other groups who gained through their roles as intermediaries. These agents sought to profit from the business opportunity presented by the moment of compensation in the mid-1830s by facilitating the collection of compensation awards on behalf of slave-owners and charging commission fees for their services. The results show that just 10 individual account names had over 8, 000 transactions totalling £2.2 million. The largest agents were partners in London banks and merchant firms that had pre-existing commercial ties to the colonies that received compensation in Reduced Annuities (Cape of Good Hope, Mauritius, and the Virgin Islands). Our analysis also shows that this stock was quickly sold, meaning that compensation awards made in Reduced Annuities were converted into cash. By 1844, almost none of the £3.4 million in compensation was still held as Reduced Annuities by those to whom it had been awarded, or by those who had collected it. All of this provides further evidence for the strong links between financial institutions in the City of London, the capital generated through the transatlantic slavery economy, and the compensation process during the 1830s.
    Keywords: Business history; financial history; colonialism; slavery
    JEL: F54 N23 N83
    Date: 2022–11–25
  20. By: Zhiyuan Chen (School of Business, Renmin University of China); Minjie Deng (Department of Economics, Simon Fraser University); Min Fang (Department of Economics, University of Florida)
    Abstract: This paper documents that firms are increasingly financing innovation using their stock of innovation, measured as patents. We refer to this behavior as financing innovation with in- novation. Drawing on patent collateral data from both the US and China, we first show that (1) in both countries, the total number and share of patents pledged as collateral have been rising steadily, (2) Chinese firms employ patents as collateral on a smaller scale and with a lower intensity than US firms, (3) firms increase their borrowing and innovation after they start to use patent collateral. We then construct a heterogeneous firm general equilibrium model featuring idiosyncratic productivity risk, innovation capital investment, and borrow- ing constrained by patent collateral. The model emphasizes two barriers that hinder the use of patent collateral: high inspection costs and low liquidation values of patent assets. We parameterize the model to firm-level panel data in the US and China and find that both barriers are significantly more severe in China than in the US. Finally, counterfactual analyses show that the gains in innovation, output, and welfare from reducing the inspection costs in China to the US level are substantial, moreso than enhancing the liquidation value of patent assets.
    JEL: E22 G32 O31 O33
    Date: 2022–09

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