Financial Development and City Growth: Evidence from Northeastern American Cities, 1790-1870
NBER Working Paper No. 15997
Using cross sectional and panel techniques, we find a positive and strong correlation between financial development and subsequent city growth in the Northeastern United States between 1790 and 1870. The correlation is robust to controls for geographical characteristics of the city, the percentage of population working in different sectors, and its initial population. This positive association is still significant when we control for sample selection. Propensity score matching estimators that compare similar cities in terms of observables and Heckman models that control for unobservables also yield a positive association between finance and urban growth. Our estimates suggest that the presence of a bank at a given location increases its subsequent growth by one to two percentage points per year. Because urban growth was correlated with economic development in the nineteenth-century US, we believe our results provide further support for the finance-growth nexus.