Juan (Francisco) Carluccio Banque de France Discussion of “Finance and Creative Destruction” by Francesca Lotti and Francesco Manaresi Juan (Francisco) Carluccio Banque de France

This paper Estimates the impact of changes in banking competition on different measures of firm dynamics: entry/exit, employment reallocation, productivity… Uses very detailed data for 1996-2007: On Italy’s banking system: the universe of deposits and the nr of branches broken down by province, and the composition of banking groups Data on the universe of firms with at least one employee from Social Security records Information on M&As in the banking industry Takes advantage of a feature of Italian competition regulation: the Anti-Trust Authority can force banks to sell branches if the pre-M&A combined market share (in deposits) exceeds 15%. Studies how changes in competition at the province-level affect province-sector level dynamics

Identification Strategy Simple OLS regressions of firm performance on banking competition measures likely to be plagued with simultaneity/reverse causality issues.  need some exogenous variation in competition The 15% market criteria acts as a treatment effect: provinces below are not exposed to AA’s (potential) restrictions while those above are. This should induce a discontinuity in province-level outcomes around the threshold, so that the effect of the treatment can be estimated locally (i.e. exploiting differences between those just above and those just below).  suggests the use of a RDD framework

Main results In treated provinces, w.r.t. non-treated ones: Lower concentration in both deposits and loans. Lower increases in market shares and the nr of branches. Higher entry, smaller entrants, higher survival of entrants and higher labor productivity.

Comments (I) Why not studying credit-market outcomes directly? ie mainly of interest rates and the total supply of credit (or its distribution across firms types). In the end this is what we mainly care about. Related to the above point, I think the exposition of the paper could be improved. It really needs a deeper discussion of the theoretical mechanisms. At first sight, it does not seem obvious that higher competition results in easier credit access to small/new firms. And inspection of the literature shows there is indeed a debate, which should be discussed. And ideally, you could try to disentangle the different effects of concentration (ie positive and negatives). One line to pursue could be to study heterogeneity across sectors. Again related to point above: the relationship with Bonnacorsi di Patti and Dell’Aricia (2004) needs to be discussed. Why do the results differ?

Comments (II) The results show that being above the threshold is associated with lower concentration and higher entry, etc. They suggest an impact of competition on these outcomes, but in my view they do not establish a causal relationship. Is there a way to go forward on this? Can you use e.g. the predicted HHI in a second step as a determinant of firm outcomes? One alternative explanation I can think of could be that mergers result in re-organization of production of the merged banks, leading a reduction in the nr of branches and higher/cheaper credit supply through higher efficiency. If the resulting bank accounts has a (minimum) 15% share, then market-wide variables can be affected by it. Would it make sense to run the model with sector-province FE? To better account for composition effects. There limits to the identification strategy should be discussed a bit more in depth. Eg the possibility of endogeneity of the treatment, the fact that banks “might” be restricted by AA (which probability is likely to increases with market share).

Comments (III) Do you have info on whether the branches are sold or closed? One potential negative impact of M&As is through breaking long-term, personalized bank-firm relationships, which are pointed as important for small firms. It would be interesting to look at this using the data on branches (see Nguyen, 2016 on closing and Montoriol-Garriga, 2008 on mergers). Would it be interesting (feasible?) to use firm-level outcomes as dep var? you could look at investment, etc. (Duqueroy, 2016). Another interesting extension could be to look at the impact on international trade (exports, entry into the export market, survival, etc.) If you had the full set of M&A’s decisions, how would you proceed?

Final remarks Very nice paper, carefully executed, with great data and a proper institutional setting allowing inference. Focuses on an important issue in which there is ongoing debate. The theoretical underpinnings could be pushed further to make the paper more substantive. The analysis can be deepened to make a sharper point.  Overall, a great and promising paper!