Banking Deregulation and Innovation
28 Pages Posted: 27 Feb 2013 Last revised: 29 Oct 2015
Date Written: February 22, 2013
We document empirical support for a key micro-level channel --- innovation by young, private firms --- through which financial sector deregulation affects economic growth. We find that intrastate banking deregulation, which increased the local market power of banks, decreased the level and risk of innovation by young, private firms. In contrast, interstate banking deregulation, which decreased the local market power of banks, increased the level and risk of innovation by young, private firms. These contrasting effects on innovation also translated into contrasting effects on economic growth. Our study suggests that the nature of financial sector deregulation crucially affects its potential benefits to the real economy.
Keywords: banking, innovation, growth, young firms, private firms
JEL Classification: G28, L43, O31, O43, K23
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