Capital Mobility and Regulation Frictions: Evidence from U.S. Lottery Winners

Abstract

Despite the banking deregulation that lifted restrictions on bank expansion across state lines, I find that state borders are still relevant for credit allocation in the United States. Using a new source of quasi-experimental variation in bank funding from lottery winners, I show that small business lending mostly increases in the state where the shock occurs. Results are not explained by local demand or bank charter type and are robust to comparing contiguous CBSA pairs across state borders. Consistent with part of the banking regulation reducing capital mobility, the effects are more pronounced for banks for which the regulation binds.

Keywords: Financial Integration, Banking Regulation, Policy Distortions

JEL Classification: G21, G28, G32