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Liquidity Windfalls and Reallocation: Evidence from Farming and Fracking

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  • Richard T. Thakor

    (Carlson School of Management, University of Minnesota, Minneapolis, Minnesota 55455; MIT Laboratory for Financial Engineering, Cambridge, Massachusetts 02142)

Abstract

Financing frictions may create a misallocation of assets in a market, thus depressing output, productivity, and asset values. This paper empirically explores how liquidity shocks generate a reallocation that diminishes this misallocation. Using a unique data set of agricultural outcomes, I explore how farmers respond to a relaxation of financial constraints through a liquidity shock unrelated to farming fundamentals, namely exogenous cash inflows caused by an expansion of hydraulic fracturing (fracking) leases. Farmers experiencing positive cash flow shocks increase their land purchases, which results in a reallocation effect. Examining purchases across areas, I find that farmers in high-productivity areas who receive cash flow shocks buy farmland in low-productivity areas, but farmers in low-productivity areas receiving positive cash flow shocks do not. Moreover, farmers increase their purchases of vacant (undeveloped) land. Average output, productivity, equipment investment, and profits all increase significantly following these positive cash flow shocks. Farmland prices also rise significantly, consistent with a cash-in-the-market pricing effect. These effects are consistent with an efficient reallocation of land toward more productive users.

Suggested Citation

  • Richard T. Thakor, 2023. "Liquidity Windfalls and Reallocation: Evidence from Farming and Fracking," Management Science, INFORMS, vol. 69(10), pages 6224-6250, October.
    • Handle: RePEc:inm:ormnsc:v:69:y:2023:i:10:p:6224-6250
    DOI: 10.1287/mnsc.2022.4602
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