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Banking deregulation and innovation

Author

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  • Chava, Sudheer
  • Oettl, Alexander
  • Subramanian, Ajay
  • Subramanian, Krishnamurthy V.

Abstract

We document empirical support for a key micro-level channel—innovation by young, private firms—through which financial sector deregulation affects economic growth. We find that intrastate banking deregulation, which increased the local market power of banks, decreased the level and risk of innovation by young, private firms. In contrast, interstate banking deregulation, which decreased the local market power of banks, increased the level and risk of innovation by young, private firms. These contrasting effects on innovation also translated into contrasting effects on economic growth. Our study suggests that the nature of financial sector deregulation crucially affects its potential benefits to the real economy.

Suggested Citation

  • Chava, Sudheer & Oettl, Alexander & Subramanian, Ajay & Subramanian, Krishnamurthy V., 2013. "Banking deregulation and innovation," Journal of Financial Economics, Elsevier, vol. 109(3), pages 759-774.
  • Handle: RePEc:eee:jfinec:v:109:y:2013:i:3:p:759-774
    DOI: 10.1016/j.jfineco.2013.03.015
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    Keywords

    Banking; Innovation; Growth; Young firms; Private firms;

    JEL classification:

    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • L43 - Industrial Organization - - Antitrust Issues and Policies - - - Legal Monopolies and Regulation or Deregulation
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth
    • K23 - Law and Economics - - Regulation and Business Law - - - Regulated Industries and Administrative Law

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