Aware that the problem most often faced by entrepreneurs is inaccessibility to capital markets, states are developing programs to overcome the lack of financing for small businesses. Eighteen states have gone so far as to put at risk a portion of public pension funds, forming their own venture capital organizations. Rural policymakers, believing that their regions lack the capital necessary for development, are currently exploring credit programs as a strategy to bolster their lagging economies.;Employing the U.S. Census of Manufactures: Geographic and Industry Series and utilizing grouped logit analysis, it is demonstrated that the probability of a firm locating in a rural county is positively related to a proxy for the firm's ratio of its endowed capital stock to its desired level of capital. Controlling for industry specific technology, this study rejects the null-hypothesis that rural firms have adequate access to capital and that the availability of capital has no effect on regional location; for 7 of 9 bottom-of-cycle industries. For these 7 industries, a 1 percent increase in the relative capital stock variable increases a firm's probability of locating in a rural county by.8 percent to 4.5 percent.;This dissertation studies regional differences in per capita income in an environment of imperfect capital markets, specifically asymmetric information between lenders and borrowers, which traditional regional development models have not focused on. A game-theoretic model is developed in which regional location is a strategic variable for entrepreneurs. The results indicate that there exists an asymmetric Cournot-Nash mixed strategies equilibrium in which financial intermediaries and large capital-intensive firms are located in a high wage region, while small labor-intensive credit-rationed firms are located in a low wage region. These regions are interpreted as urban and rural regions.
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