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Learning by Necessity: Government Demand, Capacity Constraints, and Productivity Growth

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  • Ethan Ilzetzki

Abstract

This paper studies how firms adapt to demand shocks when facing capacity constraints. I show that increases in government purchases raise total factor productivity in quantity units at the production line level. Productivity gains are concentrated in plants facing tighter capacity constraints, a phenomenon I call "learning by necessity." Evidence is based on newly digitized archival data on US World War II aircraft production. Shifts in demand across aircraft with different strategic roles provide an instrument for aircraft demand. I show that plants adapted to surging demand by improving production methods, outsourcing, and combating absenteeism, primarily when facing tighter capacity constraints.

Suggested Citation

  • Ethan Ilzetzki, 2024. "Learning by Necessity: Government Demand, Capacity Constraints, and Productivity Growth," American Economic Review, American Economic Association, vol. 114(8), pages 2436-2471, August.
    • Handle: RePEc:aea:aecrev:v:114:y:2024:i:8:p:2436-71
    DOI: 10.1257/aer.20230033
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    More about this item

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • L93 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Air Transportation
    • N12 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - U.S.; Canada: 1913-
    • N42 - Economic History - - Government, War, Law, International Relations, and Regulation - - - U.S.; Canada: 1913-
    • N62 - Economic History - - Manufacturing and Construction - - - U.S.; Canada: 1913-

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