Thursday, November 17, 2022 4:00 pm EST
Abstract: This paper studies how credit constraints shape the adjustment to productivity shocks in both the short and long run. Using the 1950s US drought along with new microeconomic data on bank lending, the paper finds that population growth, bank-lending and net emigration decline sharply in drought exposed areas with limited initial access to bank finance. In contrast, agricultural investment and long-run productivity increased more in drought-exposed areas with access to bank finance, allowing these areas to leapfrog otherwise similar areas in the subsequent decades. These results suggest that access to market-based sources of finance can facilitate long-run adaptation to large adverse productivity shocks.
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