The financial origins of regional inequality

An increasing number of policies addresses spatial inequality, which is believed to lie at the heart of economic and social cleavages, including entrenched poverty, deaths of despair, and political polarization. Yet little is known about the origins of the gap between prospering urban and "left-behind" rural areas that has emerged in the US since the 1980s. We provide new evidence on the role of banking deregulation in explaining this rural-urban divergence in incomes. In particular, we show that the income gap widened following the removal of geographic restrictions on banking. While deregulation promoted an overall increase in incomes, the increase was significantly larger in urban counties. We show that this is due to increased competition in the banking industry in cities post deregulation. Competition benefited financially constrained small and young firms, thereby boosting employment and incomes in urban areas. Our findings inform the debate on regional inequality and the design of place-based policies.