Financial frictions and employment during the Great Depression

Research output: Contribution to journalArticle

1 Citation (Scopus)

Abstract

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 using 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. We find that the lack of access to credit likely accounted for a substantial fraction of the aggregate decline in employment of large firms between 1928 and 1933.

Original languageEnglish (US)
JournalJournal of Financial Economics
DOIs
StatePublished - Jan 1 2019

Fingerprint

Great Depression
Financial frictions
Friction
Credit supply
Public debt
Large firms
Financial constraints
Contraction
Substitute
Bank failure
Access to credit
Bond market
Private debt
Disruption
Financing
Causal effect

Keywords

  • Credit
  • Financial constraints
  • Great Depression
  • Labor
  • Unemployment

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics
  • Strategy and Management

Cite this

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title = "Financial frictions and employment during the Great Depression",
abstract = "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 using 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. We find that the lack of access to credit likely accounted for a substantial fraction of the aggregate decline in employment of large firms between 1928 and 1933.",
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author = "Efraim Benmelech and Carola Frydman and Dimitris Papanikolaou",
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AB - 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 using 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. We find that the lack of access to credit likely accounted for a substantial fraction of the aggregate decline in employment of large firms between 1928 and 1933.

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