Working Paper: NBER ID: w23216
Authors: Efraim Benmelech; Carola Frydman; Dimitris Papanikolaou
Abstract: We provide new evidence that a disruption in credit supply played a quantitatively significant role in the unprecedented contraction of employment during the Great Depression. To analyze the role of financing frictions in firms' employment decisions, we use a novel, hand-collected dataset of large industrial firms. Our identification strategy exploits preexisting variation in the need to raise external funds at a time when public bond markets essentially froze. Local bank failures inhibited firms' ability to substitute public debt for private debt, which exacerbated financial constraints. We estimate a large and negative causal effect of financing frictions on firm employment. Interpreting the estimated elasticities through the lens of a simple structural model, we find that the lack of access to credit may have accounted for 10% to 33% of the aggregate decline in employment of large firms between 1928 and 1933.
Keywords: financial frictions; employment; Great Depression
JEL Codes: E24; E5; G01; G21; G31; J6; N42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Financial frictions (G19) | Firm employment (M51) |
| Maturing debts (G32) | Employment contraction (J63) |
| National bank failures (G28) | Employment contraction (J63) |
| Financial frictions (G19) | Aggregate decline in employment (J63) |
| Lack of access to credit (G21) | Employment level (J23) |