DP3307 Does Local Financial Development Matter?

Author(s): Luigi Guiso, Paola Sapienza, Luigi Zingales
Publication Date: March 2002
Keyword(s): economic development, entrepreneurship, financial development, financial integration
JEL(s): G30
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=3307

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.