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The Role of Social Capital in Financial Development

Author

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  • LUIGI GUISO
  • PAOLA SAPIENZA
  • LUIGI ZINGALES

Abstract

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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Suggested Citation

  • Luigi Guiso & Paola Sapienza & Luigi Zingales, 2000. "The Role of Social Capital in Financial Development," CRSP working papers 511, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
    • Handle: RePEc:wop:chispw:511
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    File URL: http://gsbwww.uchicago.edu/fac/finance/papers/trust.pdf
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    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development

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