Learning by Necessity: Government Demand, Capacity Constraints, and Productivity Growth

This paper studies how firms adapt to demand shocks when facing capacity constraints. I show that increases in government purchases raise total factor productivity measured in quantity units at the production-line level. Productivity gains are concentrated in plants facing tighter capacity constraints, a phenomenon I call "learning by necessity". Evidence is based on newly digitized data from archival sources on US World War II aircraft production. Shifts in military strategy provide an instrument for aircraft demand. I show that plants adapted to surging demand by improving production methods, outsourcing, and combating absenteeism, primarily when facing tighter capacity constraints.