Regional favoritism in access to credit: Just believe it

Francis Osei-Tutu and Laurent Weill

No 1/2023, BOFIT Discussion Papers from Bank of Finland Institute for Emerging Economies (BOFIT)

Abstract: We examine the effect of regional favoritism on the access of firms to credit. Using firm-level data on a large sample of 29,000 firms covering 47 countries, we investigate the hypothesis that firms in the birth regions of national political leaders have better access to credit. Our evidence suggests that firms located in birth regions of political leaders are less likely to be credit constrained. The effect takes place through the demand channel: firms in leader regions face fewer hurdles in applying for loans. We find no evidence, however, of preferential lending from banks to firms in leader regions. Thus, regional favoritism affects access to credit through differences in perceptions of firm managers, not deliberate changes in the allocation of resources by political leaders.

Keywords: regional favoritism; access to credit; borrower discouragement (search for similar items in EconPapers)
JEL-codes: D72 G21 (search for similar items in EconPapers)
Date: 2023
New Economics Papers: this item is included in nep-ban, nep-bec, nep-cfn, nep-des, nep-fdg, nep-sbm and nep-ure
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bofitp:12023

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