Bank market power and incentives for firm creation in innovative industries

I examine the role of banking competition for transmission of incentives to the creation of innovative firms. Exploiting the 2012 Start-Up Italy Act, designed to foster firm creation through public bank guarantees, I document that the policy increased the creation of innovative firms by 24 percent between 2012 and 2015, but only in provinces where banking competition is stronger. Weaker banking competition leads to less guaranteed lending, fewer venture capital deals and lower leverage for these firms, resulting in higher entrepreneurial migration. The findings suggest that bank market power plays a crucial role in shaping the market for entrepreneurial finance.