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Does Local Financial Development Matter?

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  • Guiso, Luigi
  • Sapienza, Paola
  • Zingales, Luigi

Abstract

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.

Suggested Citation

  • Guiso, Luigi & Sapienza, Paola & Zingales, Luigi, 2002. "Does Local Financial Development Matter?," CEPR Discussion Papers 3307, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:3307
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    More about this item

    Keywords

    economic development; entrepreneurship; financial development; financial integration;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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