Does Local Financial Development Matter?
46 Pages Posted: 20 May 2003
There are 3 versions of this paper
Does Local Financial Development Matter?
Does Local Financial Development Matter?
Date Written: April 2003
Abstract
We study the effects of differences in local financial development within an integrated financial market. We construct a new indicator of financial development by estimating a regional effect on the probability that, ceteris paribus, a household is shut off from the credit market. By using this indicator we find that financial development enhances the probability an individual starts his own business, favors entry, increases competition, and promotes growth of firms. As predicted by theory, these effects are weaker for larger firms, which can more easily raise funds outside of the local area. These effects are present even when we instrument our indicator with the structure of the local banking markets in 1936, which, because of regulatory reasons, affected the supply of credit in the following 50 years. Overall, the results suggest local financial development is an important determinant of the economic success of an area even in an environment where there are no frictions to capital movements.
Keywords: Financial Development, Financial Integration, Entrepreneurship, Economic Development
JEL Classification: G30
Suggested Citation: Suggested Citation
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