Local State Capacity and Economic Development of Regions

This paper studies the impact of local state capacity on the economic development of regions. We exploit a change in the municipal structure of Turkey in 2012 that converted 14 municipalities to metropolitan municipalities. Metropolitan municipalities have more control over local county municipalities and a larger budget. Using credit registry and firm balance sheet data, we show that local firms' long-term loans from privately-owned banks and employment increased in the new metropolitan provinces, but there is no corresponding increase in productivity. The effects on both outcomes emerge when the legislation was enacted and the size of the effects grow over time after the implementation of the law.