Does Access to External Finance Improve Productivity? Evidence from a Natural Experiment

Abstract:     
We study the relation between access to finance and productivity. Our contribution to the literature is a clean identification of a causal effect of access to finance on productivity. Specifically, we exploit an exogenous shift in demand for a product to expose how producers adapt their productivity in the presence of varying levels of access to finance. We use a triple differences testing approach and find that production increases the most over the sample period in areas with relatively strong access to finance, even in comparison to a control group. This result is statistically significant, and robust to a variety of controls, alternative variables, and tests. The causal effect of access to finance on productivity that we find speaks to the larger role of finance in economic growth.

Keywords: growth, finance, banking, productivity, crop yields, ethanol

JEL Classifications: G21, D24, Q12, Q14

Working Paper Series