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Financial Frictions and Agricultural Productivity Differences

Wei Wang and Junmin Liao
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Wei Wang: Washington University in St. Louis
Junmin Liao: Washington University in St. Louis

No 1314, 2013 Meeting Papers from Society for Economic Dynamics

Abstract: This paper explores the role of financial frictions in accounting for agricultural productivity differences. A two-sector general equilibrium model with a subsistence consumption requirement and financial frictions is constructed to explain and quantify the importance of financial frictions in agricultural labor productivity differences. Severer financial frictions decrease the use of intermediate inputs while increase the use of labor inputs. Consequently, labor productivity in agricultural sector is lower and hence, due to a larger employment share in agricultural sector, aggregate labor productivity is also lower. The quantitative results show that a substantial part of observed agricultural employment share and labor productivity differences can be accounted for by financial frictions.

Date: 2013
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