Does Bank Concentration Lead to Concentration in Industrial Sectors?

This paper explores the effect of banking market structure on the market structure of industrial sectors. It asks whether concentration in the banking market promotes the formation of industries constituted by a few, large firms, or rather, whether it facilitates the continuous entry of new firms, thus maintaining unconcentrated market structures across industries. Theoretical arguments could be made to support either hypotethical scenario. Empirical evidence is derived from a sample of 35 manufacturing industries in 17 OECD countries, adopting a methodology that allows controlling for other determinants of industry market structure common across industries or across countries. Bank concentration is found to enhance industries’ market concentration, especially in sectors highly dependent on external finance. Such effect is however weaker in countries characterized by higher overall financial development. JEL Classification Codes: L2, G2, G3 ∗I have benefited from the comments of seminar participants at the Federal Reserve Bank of Chicago and at Ente L. Einaudi of Rome. I also thank Judy Chevalier, John Fernald, Michele Gambera, Boyan Jovanovic, David Marshall and Luigi Zingales for their comments and suggestions. The views expressed herein are those of the author and not necessarily those of the Federal Reserve Bank of Chicago or the Federal Reserve System.