A traffic-jam theory of growth

We investigate the growth–finance nexus in an endogenous growth model with search frictions and congestion effects in credit and innovation markets. The interaction between these two frictions generates a non-monotonic, inverted-U relationship between financial development and growth. Financial development exerts two opposing forces: a direct positive finance channel by easing access to funding and an indirect negative congestion channel, as greater financial activity draws more firms into R&D competition for scarce innovation resources. The resulting hump-shaped pattern implies that excessive financial development can slow technological progress. The mechanism remains robust when allowing for firm heterogeneity that can generate composition effects. In a calibration close to the U.S. economy, the impact of finance on growth is negative but quantitatively small, consistent with the observation that, over the last century, most advanced economies have experienced financial expansion alongside nearly constant GDP growth rates. • An endogenous growth model with search and congestion frictions in credit and R&D. • The interaction of frictions generates an inverted-U link between finance and growth. • Excessive financial development dampens innovation; effect modest in U.S. calibration.