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Regional Implications of Financial Market Development: Credit Rationing, Trade, and Location

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  • Maximilian von Ehrlich
  • Tobias Seidel

Abstract

We develop a heterogeneous-firms model with trade in goods, labor mobility and credit constraints due to moral hazard. Mitigating financial frictions reduces the incentive of high-skilled workers to migrate to one region such that an unequal distribution of industrial activity becomes less likely. Hence, financial market development has opposite regional implications as trade liberalization. While the former leads to more dispersion of economic activity across space, the latter tends to drive clustering. We provide empirical evidence for this hypothesis by combining industry-region variation in the spatial concentration of economic activity with information on the access to credit and the dependence on external finance. Our estimates for 20 European countries and eleven industries confirm that financial market development mitigates the clustering of economic activity.

Suggested Citation

  • Maximilian von Ehrlich & Tobias Seidel, 2013. "Regional Implications of Financial Market Development: Credit Rationing, Trade, and Location," CESifo Working Paper Series 4063, CESifo.
    • Handle: RePEc:ces:ceswps:_4063
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    References listed on IDEAS

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    Cited by:

    1. von Ehrlich, Maximilian & Seidel, Tobias, 2013. "More similar firms — More similar regions? On the role of firm heterogeneity for agglomeration," Regional Science and Urban Economics, Elsevier, vol. 43(3), pages 539-548.
    2. von Ehrlich, Maximilian & Seidel, Tobias, 2015. "Regional implications of financial market development: Industry location and income inequality," European Economic Review, Elsevier, vol. 73(C), pages 85-102.
    3. Carsten Eckel & Florian Unger, 2023. "Credit Constraints, Endogenous Innovations, And Price Setting In International Trade," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 64(4), pages 1715-1747, November.
    4. Irlacher, Michael & Unger, Florian, 2018. "Capital market imperfections and trade liberalization in general equilibrium," Journal of Economic Behavior & Organization, Elsevier, vol. 145(C), pages 402-423.
    5. Unger, Florian, 2016. "The Role of Financial Intermediation in International Trade," VfS Annual Conference 2016 (Augsburg): Demographic Change 145855, Verein für Socialpolitik / German Economic Association.

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    More about this item

    Keywords

    financial market development; credit constraints; moral hazard; location; migration; heterogeneous firms; trade; labor mobility;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • R11 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Regional Economic Activity: Growth, Development, Environmental Issues, and Changes

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