Finance and Creative Destruction: Evidence for Italy

Abstract

In this paper we provide new evidence on the relationship between market concentration in the banking industry and firm dynamics. In Italy, in the case of a banking merger or acquisition, the antitrust authorities can require the sale of bank branches if the joint market share of the banks involved in the merger exceeds a specific threshold. We exploit this feature to carry out RDD estimates of (i) the effect of intervention by antitrust authorities on banking market concentration, and (ii) the effect of the level of bank concentration on various measures of firm dynamics. The results show that, in those areas where the authorities forced branch sales, firm's entry rates increase, reallocation of employees from incumbent to entrant firms is higher, and the survival rate of newly formed businesses increases. The overall allocative efficiency, as measured by an Olley-Pakes decomposition of labor productivity, is found to improve.

Keywords: bank competition, firm dynamics, entry, exit, firm size, regression discontinuity

JEL Classification: G21, L11, M13