Abstract: This paper presents a dynamic model of firm financing where firms use financial slack to reduce rent extraction by financiers with bargaining power. Financing is lumpy because it is optimal to bargain infrequently. Moreover, firms typically finance ‘early’ before exhausting internal funds to bargain when their outside options are better. Firms with better prospects maintain greater financial slack. Firms with good financing alternatives always keep funds that exceed investment needs, whereas firms lacking such alternatives delay financing until funds are depleted – and occasionally forgo investment – to avoid paying excessive rents. Investment irreversibility magnifies financing rents given low productivity.

Abstract: This paper develops a model of startup innovation where financing frictions in implementing successful innovations concentrate prior innovation activity. Because funds are more valuable ex-post upon success of innovation than failure, there exists within-firm complementarity ex-ante between innovation and savings. Consequently, startup funds have (locally) increasing returns to scale, concentrating innovation towards well-funded startups that additionally raise costly entrepreneurial financing. Concentration increases elasticity of aggregate innovation to financing costs. Utilizing a model of financing frictions that enables tractable aggregation, I show that time-sensitiveness in implementation increases concentration while ease of `killer acquisitions' decreases it. Concentration is amplified in general equilibrium.