Local financial development, socio-institutional environment, and firm productivity: Evidence from Italy

- The paper studies the effects of financial development on firm productivity.
- It shows that these effects are conditional on socio-institutional development.
- Positive effects are stronger in higher-quality socio-institutional environments.

This paper uses the case of Italy to investigate the effects of local financial and socio-institutional development on productivity. The analysis employs firm-level productivity data and exploits variations in banking sector development, judicial enforcement, and social capital across Italian provinces. After controlling for potential endogeneity, our empirical results suggest that the real effects of financial development are conditional on the quality of the socio-institutional environment. In particular, we find that the positive effects of greater financial depth on productivity are stronger when the socio-institutional environment is sufficiently developed. Therefore, to exploit potential productivity gains stimulated by financial development, it is necessary to achieve a higher-quality socio-institutional environment, including reducing the duration of civil trials.