Who benefits most from financial liberalization - incumbents or new entrants? A recent study of the U.S. branching deregulation from the mid-70s to the mid-90s suggests a differentiated answer.
Consistent with the hypothesis that small firms were the ones that benefited most from financial liberalization, branch deregulation fostered entry of start-ups more than the expansion of existing enterprises, especially among establishments with fewer than 20 employees. However, there was also a significant increase in business failures, again concentrated among small start-ups.
Liberalization seemed to have increased churning and creative destruction – and many entrants did not survive to challenge the incumbents.
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