Financial Shocks, Productivity, and Prices

We study the interconnection between the productivity and pricing effects of financial shocks. Combining administrative records on firm-level output prices and quantities with quasi-experimental variation in credit supply, we show that a tightening of credit conditions has a persistent, yet delayed, negative effect on firms’ long-run physical productivity growth (TFPQ) but also induces firms to change their pricing policies. Commonly used revenue-based productivity measures (TFPR)—which conflate price and productivity—offer biased predictions regarding the consequences of financial shocks for firms’ productivity growth, underestimating the long-run elasticity of physical productivity to credit supply by half. We also show that the pricing adjustments themselves have productivity implications. Firms use low pricing as a source of internal financing, allowing them to avoid cutting expenditures on productivity-enhancing activities, thereby softening the impact of financial shocks. We incorporate these forces into a quantitative model of firm dynamics to quantify the importance of productivity and pricing dynamics (and their interplay) in driving the scarring effects of financial crises on aggregate productivity and welfare.