Regional implications of financial market development: Industry location and income inequality

Maximilian von Ehrlich and Tobias Seidel

European Economic Review, 2015, vol. 73, issue C, 85-102

Abstract: We develop a heterogeneous-firms model with trade in goods, labor mobility and credit constraints due to moral hazard. Mitigating financial frictions reduces the incentive of mobile workers to migrate to one region such that an unequal distribution of industrial activity becomes less likely. Hence, financial market development has opposite regional implications as trade liberalization. While the former leads to more dispersion of economic activity across space, the latter tends to drive clustering. This has immediate implications for income inequality both between regions and workers. According to our model, financial development reduces inequality in both dimensions.

Keywords: Financial market development; Credit constraints; Migration; Heterogeneous firms; Trade (search for similar items in EconPapers)
JEL-codes: F12 F15 F36 R11 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (18)

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Related works:
Working Paper: Regional Implications of Financial Market Development: Industry Location and Income Inequality (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:73:y:2015:i:c:p:85-102

DOI: 10.1016/j.euroecorev.2014.10.008

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