Capital Market Frictions and Economic Geography

28 Pages Posted: 31 Jan 2014

See all articles by Hendrik Hakenes

Hendrik Hakenes

Finance Group; Centre for Economic Policy Research (CEPR)

Jan Kranich

Leibniz Universit├Ąt Hannover

Date Written: January 30, 2014

Abstract

Economic geography aims to explain agglomeration primarily through the channels of increasing returns, monopolistic competition and international factor mobility. By contrast, this paper constructs a theoretical model based on capital market frictions. Monopolistically competitive firms are run by managers who are subject to moral hazard. Endogenously, the impact of capital market frictions is smaller in industrialized regions, which makes it cheaper to incentivize managers. Consequently, firms can pay higher interest rates on capital in these regions, which in turn attracts more capital. This simple mechanism leads to a host of effects and, therefore, predictions in terms of economic development and corporate governance.

Keywords: Capital market frictions, moral hazard, economic geography, core-periphery

JEL Classification: G21, G15, F12, F21

Suggested Citation

Hakenes, Hendrik and Kranich, Jan, Capital Market Frictions and Economic Geography (January 30, 2014). Available at SSRN: https://ssrn.com/abstract=2388138 or http://dx.doi.org/10.2139/ssrn.2388138

Hendrik Hakenes (Contact Author)

Finance Group ( email )

Adenauerallee 24-42
D-53113 Bonn
Germany
+49-228-73-9225 (Phone)

HOME PAGE: http://www.finance.uni-bonn.de/hakenes

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Jan Kranich

Leibniz Universit├Ąt Hannover ( email )

Institut fur Rechnungslegung und WP
Koenigsworther Platz 1
Hannover, 30167
Germany

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
56
Abstract Views
673
rank
436,505
PlumX Metrics