Regional Implications of Financial Market Development: Credit Rationing, Trade, and Location

Maximilian von Ehrlich and Tobias Seidel

No 4063, CESifo Working Paper Series from CESifo

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 high-skilled 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. We provide empirical evidence for this hypothesis by combining industry-region variation in the spatial concentration of economic activity with information on the access to credit and the dependence on external finance. Our estimates for 20 European countries and eleven industries confirm that financial market development mitigates the clustering of economic activity.

Keywords: financial market development; credit constraints; moral hazard; location; migration; heterogeneous firms; trade; labor mobility (search for similar items in EconPapers)
JEL-codes: F12 F36 R11 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Working Paper: Regional Implications of Financial Market Development: Credit Rationing, Trade, and Location (2013)
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