The Role of Social Capital in Financial Development

Abstract

To identify the effect of social capital on financial development, we exploit the well-known differences in social capital (Banfield (1958), Putnam (1993)) across different parts of Italy. In areas of the country with high levels of social capital, households invest less in cash and more in stock, are more likely to use checks, have higher access to institutional credit, and make less use of informal credit. The effect of social capital is stronger where legal enforcement is weaker and among less-educated people. These results are not driven by omitted environmental variables, since we show that the behavior of movers is still affected by the level of social capital present in the province where they were born.

JEL Classification: G31, G32