The financial origins of regional inequality

Since the 1980s, a widening gap between prospering urban and "left-behind" rural areas has emerged. It is believed to lie at the heart of many economic and social cleavages, including entrenched poverty, deaths of despair, and political polarization. We show that the dismantling of restrictions on bank expansion across US states raised income growth by substantially more in urban than rural counties and explains a sizeable part of the overall divergence in incomes between regions. Examining the channel, we find that deregulation spurred labor demand especially in cities, thereby increasing local wages and incomes, which is consistent with improved access to credit. Further analyses with microdata show that deregulation reduced inequality within rural areas by lifting the incomes of lower-income households but increased inequality in urban areas by raising the incomes of high-skilled and college-educated workers.