Summary:
Aghion on the power of entrepreneurs; designing institutions to foster innovation; free enterprise alone not sufficient; balance between anti-trust laws and patent protection; allocation of authority and control rights within the firm; different types of financial instruments (05/02/2001)
Notes:
- Philippe Aghion: relationship between economic growth and institutions; using Schumpeter's concept of creative destruction
- Schumpeter: entrepreneurs constantly looking for new ideas that will render their rivals' ideas obsolete; by creating something new, successful innovators destroy profits that motivated their predecessors
- innovations as main source of economic growth
- Aghion: how to design institutions that foster innovation
- Aghion: free enterprise alone is not sufficient; need a finely tuned balance between business and government, between markets and legislations
- market will not prevent powerful incumbents from barring entry to new innovators; lobbying governments to introduce administrative procedures, taxes, trade barriers, and regulations to oppose further technical progress
- aim of anti-trust laws is preventing this; political constitutions aimed at circumventing vested interests
- But entrepreneurs must be able to profit from their innovations: patent laws and intellectual property
- if creative destruction too easy, not enough incentive to innovate
- strike balance between patent protection and anti-trust laws; not easy
- Aghion contribution to field of contract theory and corporate governance
- how to allocate authority and control rights within a firm;
- or between entrepreneur and investor
- entrepreneurs want investors to keep pumping money into their projects; wary investors may want to pull plug and cut losses
- previous attempts to resolve tension between entrepreneurs and investors have focused on comparative incentive effects of standard debt and standard equity; both merely different ways of sharing monetary revenues between both sides
- Aghion: different types of financial instruments can result in different control allocations between the two parties
