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

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  • Aaron Pancost

    (University of Texas at Austin McCombs Sc)

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.

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  • Aaron Pancost, 2018. "Do Financial Factors Drive Aggregate Productivity? Evidence from Indian Manufacturing Establishments," 2018 Meeting Papers 436, Society for Economic Dynamics.
    • Handle: RePEc:red:sed018:436
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    References listed on IDEAS

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    3. Montek S. Ahluwalia, 2002. "Economic Reforms in India Since 1991: Has Gradualism Worked?," Journal of Economic Perspectives, American Economic Association, vol. 16(3), pages 67-88, Summer.
    4. Abhijit V. Banerjee & Benjamin Moll, 2010. "Why Does Misallocation Persist?," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(1), pages 189-206, January.
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