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

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.