TY - JOUR
T1 - Does local financial development matter?
AU - Guiso, Luigi
AU - Sapienza, Paola
AU - Zingales, Luigi
N1 - Funding Information:
* We thank Orazio Attanasio, Edward Glaeser, Ross Levine, Paolo Mauro, Mitchell Petersen, Raghuram Rajan, Andrei Shleifer, Nicholas Souleles, and three anonymous referees for very helpful comments. We also benefited from the comments of participants in seminars at Duke University, International Monetary Fund, NBER Summer Institute 2001 Capital Markets in the Economy Meeting, NBER Corporate Finance Meeting, the University of Chicago Brown Bag lunch, the World Bank, “Macro and Micro Aspects of Economic Geography” Conference (CREI, Pompeu Fabra University), “Evolving credit markets and business cycle dynamics” Conference (European University Institute), Fourth Annual Conference on Financial Market Development in Emerging and Transition Economies (Santiago de Chile). Luigi Guiso also thanks the EEC and MURST for financial support. Luigi Zingales also thanks the Center for Security Prices and the Stigler Center at the University of Chicago for financial support.
PY - 2004/8
Y1 - 2004/8
N2 - 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 of new firms, increases competition, and promotes growth. 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.
AB - 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 of new firms, increases competition, and promotes growth. 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.
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U2 - 10.1162/0033553041502162
DO - 10.1162/0033553041502162
M3 - Review article
AN - SCOPUS:4043079888
VL - 119
SP - 929
EP - 969
JO - Quarterly Journal of Economics
JF - Quarterly Journal of Economics
SN - 0033-5533
IS - 3
ER -