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Description：
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The invention of city commercial banks (CCB) in some Chinese cities provides a unique opportunity to study the finance and growth nexus at the city level. The presence of these local banks though designed by policymakers to promote local growth by lending to SMEs, had the problem of being influenced heavily by the local governments. This paper develops a model in which firms can bribe local government to obtain credits from these banks, where large firms can offer large bribes due to its size. Credits would instead be channeled to large firms. This firm size distribution change would contrarily lower city's economic growth. Using 2001-2010 panel data for all the cities in China, we find that the establishment of CCB significantly reduced local city's economic growth. Using data on 206,771 firms during 1999-2007, we find that CCB significantly reduced firm's growth rate in that city, small firms in particular, while the effect turned positive for large firms. The firm size distribution change provides a channel for city's reduced growth rate.
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