Do Financial Factors Drive Aggregate Productivity? Evidence from Indian Manufacturing Establishments

Aaron Pancost
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Aaron Pancost: University of Texas at Austin McCombs Sc

No 436, 2018 Meeting Papers from Society for Economic Dynamics

Abstract: Numerous countries have implemented financial reforms in the past three decades, but how these reforms affect economic growth has not been established. I develop a dynamic model with heterogeneous firms and endogenous leverage to isolate the effects of financial development on aggregate productivity growth. Financial development affects aggregate productivity by shifting the allocation of resources across firms. However, productivity growth that is common to all firms but unrelated to finance also changes the allocation of resources across firms, because firms respond to productivity growth by changing leverage. I calibrate the model to plant-level data from India and find that resource re-allocation consistent with financial development explains 2%--7% of Indian labor productivity growth from 1990 to 2011. My work suggests that factors that affect productivity within firms are more important determinants of aggregate productivity than financial development.

Date: 2018
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