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The Role of Social Capital in Financial Development

  • LUIGI GUISO
  • PAOLA SAPIENZA
  • LUIGI ZINGALES

To identify the effect of social capital on financial development, we exploit the well-known differences in social capital and trust (Banfield (1958), Putnam (1993)) across different parts of Italy, using microeconomic data on households and firms. In areas of the country with high levels of social trust, households invest less in cash and more in stock, use more checks, have higher access to institutional credit, and make less use of informal credit. In these areas, firms also have more access to credit and are more likely to have multiple shareholders. The effect of trust is stronger where legal enforcement is weaker and among less-educated people. The behavior of movers is mainly affected by the level of trust of the environment where they live, but a significant fraction of the effect is also due to the level of trust prevailing in the province where they grew up.

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Paper provided by Center for Research in Security Prices, Graduate School of Business, University of Chicago in its series CRSP working papers with number 511.

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Date of creation: Feb 2000
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Handle: RePEc:wop:chispw:511
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