Entrepreneurship, Growth and Productivity With Bubbles

Abstract

Entrepreneurship, growth and total factor productivity are larger when there is a …nancial bubble. We explain these facts using a growth model with …nancial bubbles in which individuals face heterogeneous wages and returns on productive investment. The heterogeneity in the return of investment separates individuals between savers and entrepreneurs. Savers buy …nancial assets, which are deposits or a …nancial bubble. Entrepreneurs incur in a start-up cost and borrow to invest in productive capital. The bubble provides liquidities to credit-constrained entrepreneurs. These liquidities increase investment and entrepreneurship when the startup cost is large enough, which explains that growth and entrepreneurship can be larger with bubbles. Finally, productivity can be larger when the bubble further increases the investment of more productive entrepreneurs. This can occur when the return of investment is correlated with wages.