Working Paper: CEPR ID: DP3307
Authors: Luigi Guiso; Paola Sapienza; Luigi Zingales
Abstract: We study the effects of differences in local financial development within an integrated financial market. To do so, 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 their own business, favours 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. 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: economic development; entrepreneurship; financial development; financial integration
JEL Codes: G30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Entrepreneurship (M13) | Economic Growth (O49) |
| New Firm Creation (L26) | Economic Growth (O49) |
| Financial Development (O16) | Entrepreneurship (M13) |
| Financial Development (O16) | New Firm Creation (L26) |
| Financial Development (O16) | Competition (L13) |
| Financial Development (O16) | Economic Growth (O49) |