Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/234566
Authors: 
Hoffmann, Mathias
Okubo, Toshihiro
Year of Publication: 
2021
Series/Report no.: 
Working Paper No. 387
Abstract: 
We exploit the natural experiment of Japan's opening to international trade to examine how comparative advantage can shape a country's long-run path towards financial development. In the late 19th century, many of Japan's prefectures had a natural comparative advantage in silk reeling. Producing silk for export required access to finance. At the same time, for technological reasons, borrower-quality in the silk reeling industry was notoriously hard to assess. Silk exporters overcame these frictions by forming local cooperative banks. We show that in the ancient silk prefectures, local cooperative banks continued to dominate local banking markets for over a century while bigger, country-wide banks came to dominate in other regions. By the late 20th century, the silk prefectures are indistinguishable from other regions in terms of their general level of financial development. However, our results suggest that they were effectively less financially integrated with the rest of the country. Hence, comparative advantage in silk favored the emergence of a banking-system dominated by small relationship lenders. But due to the local nature of these lenders, it also caused long-term geographical segmentation in banking markets.
Subjects: 
Comparative advantage
financial development
financial integration
Japan
banking history
trade credit
export finance
silk industry
relationship lending
JEL: 
F15
F30
F40
G01
N15
N25
O16
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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