Financial frictions and employment during the Great Depression

Efraim Benmelech, Carola Frydman*, Dimitris Papanikolaou

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

45 Scopus citations


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)
Pages (from-to)541-563
Number of pages23
JournalJournal of Financial Economics
Issue number3
StatePublished - Sep 2019


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

ASJC Scopus subject areas

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


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