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Financial Development and Agglomeration

Author

Listed:
  • Commendatore, Pasquale
  • Michetti, Elisabetta
  • Purificato, Francesco

Abstract

The New Economic Geography (NEG) literature has paid little attention to the role of the banking industry in affecting where firms decide to locate their business. Within the framework of the NEG, this paper aims to fill this gap by studying the impact of the degree of regional financial development on the spatial distribution of economic activity. In order to explore this issue, we modify the standard Footloose Entrepreneur (FE) model by introducing a banking sector, while preserving all the other usual assumptions. We show that the existence of a banking sector enhances the agglomeration forces; so that, when regions are symmetric, a Core-Periphery outcome is more likely. When regions are characterised by different levels of financial development this result is reinforced and entrepreneurs are more likely to migrate towards the region where the banking sector is characterized by a higher degree of competition / lower degree of concentration and the interest rate is lower.

Suggested Citation

  • Commendatore, Pasquale & Michetti, Elisabetta & Purificato, Francesco, 2013. "Financial Development and Agglomeration," MPRA Paper 48425, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:48425
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    File URL: https://mpra.ub.uni-muenchen.de/48425/1/MPRA_paper_48425.pdf
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    References listed on IDEAS

    as
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    3. Rikard Forslid & Gianmarco I.P. Ottaviano, 2003. "An analytically solvable core-periphery model," Journal of Economic Geography, Oxford University Press, vol. 3(3), pages 229-240, July.
    4. Berger, Allen N & Hannan, Timothy H, 1989. "The Price-Concentration Relationship in Banking," The Review of Economics and Statistics, MIT Press, vol. 71(2), pages 291-299, May.
    5. Neumeyer, Pablo A. & Perri, Fabrizio, 2005. "Business cycles in emerging economies: the role of interest rates," Journal of Monetary Economics, Elsevier, vol. 52(2), pages 345-380, March.
    6. Hans Degryse & Steven Ongena, 2005. "Distance, Lending Relationships, and Competition," Journal of Finance, American Finance Association, vol. 60(1), pages 231-266, February.
    7. Corvoisier, Sandrine & Gropp, Reint, 2002. "Bank concentration and retail interest rates," Journal of Banking & Finance, Elsevier, vol. 26(11), pages 2155-2189, November.
    8. Pietro Alessandrini & Andrea F. Presbitero & Alberto Zazzaro, 2009. "Banks, Distances and Firms' Financing Constraints," Review of Finance, European Finance Association, vol. 13(2), pages 261-307.
    9. Berger, Allen N & Hannan, Timothy H, 1992. "The Price-Concentration Relationship in Banking: A Reply," The Review of Economics and Statistics, MIT Press, vol. 74(2), pages 376-379, May.
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    11. Pasquale Commendatore & Martin Currie & Ingrid Kubin, 2008. "Footloose Entrepreneurs, Taxes and Subsidies," Spatial Economic Analysis, Taylor & Francis Journals, vol. 3(1), pages 115-141.
    12. Allen N. Berger & Asli Demirgüç-Kunt & Ross Levine & Joseph G. Haubrich, 2004. "Introduction: Bank concentration and competition: an evolution in the making," Proceedings, Federal Reserve Bank of Cleveland, pages 433-451.
    13. Berger, Allen N, et al, 2004. "Bank Concentration and Competition: An Evolution in the Making," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(3), pages 433-451, June.
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    More about this item

    Keywords

    Local financial development; Banks; Agglomeration; Firm location;

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • R12 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)

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