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Financial Development and Agglomeration

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  • Commendatore, Pasquale
  • Michetti, Elisabetta
  • Purificato, Francesco

Abstract

The New Economic Geography (NEG) literature has paid little attention to the role of the banking industry in affecting where firms decide to locate their business. Within the framework of the NEG, this paper aims to fill this gap by studying the impact of the degree of regional financial development on the spatial distribution of economic activity. In order to explore this issue, we modify the standard Footloose Entrepreneur (FE) model by introducing a banking sector, while preserving all the other usual assumptions. We show that the existence of a banking sector enhances the agglomeration forces; so that, when regions are symmetric, a Core-Periphery outcome is more likely. When regions are characterised by different levels of financial development this result is reinforced and entrepreneurs are more likely to migrate towards the region where the banking sector is characterized by a higher degree of competition / lower degree of concentration and the interest rate is lower.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 48425.

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Date of creation: 18 Jul 2013
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Handle: RePEc:pra:mprapa:48425

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Keywords: Local financial development; Banks; Agglomeration; Firm location;

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References

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  1. Corvoisier, Sandrine & Gropp, Reint, 2001. "Bank Concentration and Retail Interest Rates," Working Paper Series, European Central Bank 0072, European Central Bank.
  2. Marcello Bofondi & Giorgio Gobbi, 2006. "Informational Barriers to Entry into Credit Markets," Review of Finance, European Finance Association, European Finance Association, vol. 10(1), pages 39-67.
  3. Pietro Alessandrini & Andrea F. Presbitero & Alberto Zazzaro, 2009. "Banks, Distances and Firms' Financing Constraints," Review of Finance, European Finance Association, European Finance Association, vol. 13(2), pages 261-307.
  4. Pablo A. Neumeyer & Fabrizio Perri, 2004. "Business cycles in emerging economies: the role of interest rates," Staff Report, Federal Reserve Bank of Minneapolis 335, Federal Reserve Bank of Minneapolis.
  5. Allen N. Berger, 2002. "The economic effects of technological progress: evidence from the banking industry," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2002-50, Board of Governors of the Federal Reserve System (U.S.).
  6. Degryse, H.A. & Ongena, S., 2002. "Distance, Lending Relationships and Competition," Discussion Paper, Tilburg University, Center for Economic Research 2002-16, Tilburg University, Center for Economic Research.
  7. Allen N. Berger & Timothy H. Hannan, 1987. "The price-concentration relationship in banking," Research Papers in Banking and Financial Economics, Board of Governors of the Federal Reserve System (U.S.) 100, Board of Governors of the Federal Reserve System (U.S.).
  8. Pasquale Commendatore & Martin Currie & Ingrid Kubin, 2005. "Footloose Entrepreneurs, Taxes and Subsidies," The School of Economics Discussion Paper Series, Economics, The University of Manchester 0521, Economics, The University of Manchester.
  9. Felici Roberto & Pagnini Marcello, 2005. "Distance, bank heterogeneity and entry in local banking markets," Temi di discussione (Economic working papers), Bank of Italy, Economic Research and International Relations Area 557, Bank of Italy, Economic Research and International Relations Area.
  10. Allen N. Berger & Asli Demirgüç-Kunt & Ross Levine & Joseph G. Haubrich, 2004. "Introduction: Bank concentration and competition: an evolution in the making," Proceedings, Federal Reserve Bank of Cleveland, Federal Reserve Bank of Cleveland, pages 433-451.
  11. Berger, Allen N, et al, 2004. "Bank Concentration and Competition: An Evolution in the Making," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 36(3), pages 433-51, June.
  12. Berger, Allen N & Hannan, Timothy H, 1992. "The Price-Concentration Relationship in Banking: A Reply," The Review of Economics and Statistics, MIT Press, vol. 74(2), pages 376-79, May.
  13. Jonathan A. Neuberger & Gary C. Zimmerman, 1990. "Bank pricing of retail deposit accounts and "the California rate mystery"," Economic Review, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, issue Spr, pages 3-16.
  14. Jackson, William E, III, 1992. "The Price-Concentration Relationship in Banking: A Comment," The Review of Economics and Statistics, MIT Press, vol. 74(2), pages 373-76, May.
  15. Pietro Alessandrini & Andrea F. Presbitero & Alberto Zazzaro, 2009. "Global banking and local markets: a national perspective," Cambridge Journal of Regions, Economy and Society, Cambridge Political Economy Society, Cambridge Political Economy Society, vol. 2(2), pages 173-192.
  16. Rikard Forslid & Gianmarco I.P. Ottaviano, 2003. "An analytically solvable core-periphery model," Journal of Economic Geography, Oxford University Press, Oxford University Press, vol. 3(3), pages 229-240, July.
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