Liquidity Windfalls and Reallocation: Evidence from Farming and Fracking
70 Pages Posted: 31 Dec 2016 Last revised: 7 Jun 2018
Date Written: May 2018
Financing frictions may create a misallocation of assets in a market, thus depressing output, productivity, and asset values. This paper empirically explores how liquidity shocks generate a reallocation effect that diminishes this misallocation. Using a unique dataset of agricultural outcomes, I explore how farmers respond to a relaxation of financial constraints through a liquidity shock unrelated to farming fundamentals, namely exogenous cash inflows caused by an expansion of hydraulic fracturing (fracking) leases. Farmers who receive positive cash flow shocks increase their land purchases, which results in a reallocation effect. Examining cross-county purchases, I find that farmers in high-productivity counties who receive cash flow shocks buy farmland in low-productivity counties. In contrast, farmers in low-productivity counties who receive positive cash flow shocks do not engage in similar behavior. Moreover, farmers increase their purchases of vacant (undeveloped) land. Average output, productivity, equipment investment, and profits all increase substantially following these positive cash flow shocks. Farmland prices also rise significantly, consistent with a cash-in-the-market pricing effect. These effects are consistent with an efficient reallocation of land towards more productive users.
Keywords: Misallocation, Reallocation, Productivity, Liquidity, Financial Constraints, Fracking, Agriculture, Small Business Finance, Asset Values
JEL Classification: D24, E22, G12, G31, G32, O16, Q15
Suggested Citation: Suggested Citation