Financial Frictions and Employment during the Great Depression
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.
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|Date of creation:||Mar 2017|
|Note:||CF DAE EFG LS ME|
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- Neil H. Jacoby & Raymond J. Saulnier, 1947. "Business Finance and Banking," NBER Books, National Bureau of Economic Research, Inc, number jaco47-1.
- Neil H. Jacoby & Raymond J. Saulnier, 1947. "Appendix to "Business Finance and Banking"," NBER Chapters,in: Business Finance and Banking, pages 221-230 National Bureau of Economic Research, Inc.
- Alston Lee J. & Grove Wayne A. & Wheelock David C., 1994. "Why Do Banks Fail? Evidence from the 1920s," Explorations in Economic History, Elsevier, vol. 31(4), pages 409-431, October.
- Price V. Fishback & Werner Troesken & Trevor Kollmann & Michael Haines & Paul W. Rhode & Melissa Thomasson, 2011. "Information and the Impact of Climate and Weather on Mortality Rates During the Great Depression," NBER Chapters,in: The Economics of Climate Change: Adaptations Past and Present, pages 131-167 National Bureau of Economic Research, Inc.
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