Financial Frictions and Employment during the Great Depression

Efraim Benmelech, Carola Frydman and Dimitris Papanikolaou

No 23216, NBER Working Papers from National Bureau of Economic Research, Inc

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. 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.

JEL-codes: E24 E5 G01 G21 G31 J6 N42 (search for similar items in EconPapers)
Date: 2017-03
New Economics Papers: this item is included in nep-his, nep-lab and nep-mac
Note: CF DAE EFG LS ME
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Citations: View citations in EconPapers (15)

Published as Efraim Benmelech & Carola Frydman & Dimitris Papanikolaou, 2019. "Financial Frictions and Employment during the Great Depression," Journal of Financial Economics, .

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