Project Heterogeneity and Growth: The Impact of Financial Selection on Firm Entry
Sina T. Ates and Felipe Saffie ,
PIER Working Paper No. 13-011

In the classical literature of innovation-based endogenous growth, the main engine of long- run economic growth is firm entry. Nevertheless, when projects are heterogeneous, and good ideas are scarce, a mass-composition trade-off is introduced into this link: larger cohorts have a lower average quality. As one of the roles of the financial system is to screen the quality of projects, the ability of financial intermediaries to detect promising projects shapes the strength of this trade-off.

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