Financial Development and Agglomeration

Pasquale Commendatore, Elisabetta Michetti and Francesco Purificato ()

MPRA Paper from University Library of Munich, Germany

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.

Keywords: Local financial development; Banks; Agglomeration; Firm location (search for similar items in EconPapers)
JEL-codes: G10 G21 R12 (search for similar items in EconPapers)
Date: 2013-07-18
New Economics Papers: this item is included in nep-cwa, nep-geo and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:48425

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