Regional Growth Under Financial and Political Constraints

Abstract

This thesis studies the problem of what keeps regions from growing. The first two chapters focus on the effects that the geographic mobility of financial capital has on regional growth. That is, they show what happens to the development of regions when financial capital can more easily move from regions where it is abundant to those where it is scarce. The first chapter studies the geographic integration of American banking markets between the early fifties and early eighties. We show that this financial integration was due to rising nominal rates during the Great Inflation---introducing what we term the ``nominal rate channel'' of financial integration---and to technological improvements in banks' access to national financial markets. Financial integration explains part of the higher growth of the South and West, relative to the average US state, as well as part of the relative decline of the Northern financial centers. This introduces a new framework to jointly study the dynamics of regional growth in an environment where workers and financial capital are both mobile across regions. The second chapter studies the geographic integration of mortgage markets in the US between 1933 and 1940. This integration was due to government policies that created a national mortgage market, facilitating mortgage capital to move from the financial centers to the rest of the country. Cities that had higher mortgage rates before the policy---and where mortgages became cheaper as a result of financial integration---saw higher growth in rates of homeownership, population, housing construction, and house prices. We also find effects on fertility, as young households witnessed higher birth rates in cities where mortgages became more affordable. The third chapter concerns why regional transfers to poor regions can fail to generate growth. I offer a theoretical explanation that hinges on local political economy constraints that arise when local governments are in charge of spending these transfers. Local governments' objective to be re-elected can be at odds with maximizing regional growth, transforming a policy aimed at sustaining productivity into one that depresses economic activity. This wedge comes about because local incumbent voters might rationally prefer subsidizing declining incumbent industries instead of attracting new ones, and I find evidence of these political constraints using data from the EU Cohesion policy.