Lend Me a Hand - Bank Market Power and Firm Creation in Innovative Industries

48 Pages Posted: 9 Jan 2021

See all articles by Fabrizio Core

Fabrizio Core

Erasmus University Rotterdam (EUR) - Department of Business Economics

Date Written: November 19, 2020

Abstract

This paper studies how bank market power affects firm creation in innovative industries. Theoretically, I show that the effect of bank market power is ambiguous. I exploit a 2012 policy intervention in Italy, designed to foster firm creation in innovative industries through public bank guarantees. The policy increased firm creation in innovative industries by 50%, but the increase is more than halved in provinces where banking competition is weaker. I propose a new way to parsimoniously measure bank market power and competition at the local level, and I use both a difference-in-difference-in-differences (DDD) design and an Instrumental Variables (IV) approach on a dataset of newly incorporated firms in Italy between 2010 and 2015. I document that what drives the result is a weaker increase in the amount of guaranteed credit extended to innovative industries by banks. I conclude that banking competition is an important factor for the design of policies to foster innovative firm creation.

Keywords: banking competition, bank market power, innovative, firm creation, start ups, innovation

JEL Classification: G21, G30, M13, L26

Suggested Citation

Core, Fabrizio, Lend Me a Hand - Bank Market Power and Firm Creation in Innovative Industries (November 19, 2020). Available at SSRN: https://ssrn.com/abstract=3733765 or http://dx.doi.org/10.2139/ssrn.3733765

Fabrizio Core (Contact Author)

Erasmus University Rotterdam (EUR) - Department of Business Economics ( email )

Netherlands

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