Abstract

Start-ups often find it hard to obtain external finance, due to a large informational wedge between insiders and outsiders which creates adverse selection and moral hazard problems. Banks are able to overcome the severe information problems of start-ups via close monitoring, which allows them to acquire “soft” information through contacts with the firm, its owner and the community to which they belong. In this study, we investigate how banking development at the local level affects the access to debt for start-ups, taking into account the presence of different types of banks at the local level.

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