Financial Frictions and Employment during the Great Depression / Efraim Benmelech, Carola Frydman, Dimitris Papanikolaou.

Format:

Book

Author/Creator:

Benmelech, Efraim.

Contributor:

National Bureau of Economic Research.

Frydman, Carola.

Papanikolaou, Dimitris.

Series:

Working Paper Series (National Bureau of Economic Research) no. w23216.

NBER working paper series no. w23216

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2017.

Summary:

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.

Notes:

Print version record

March 2017.