Credit Shocks and Allocative Efficiency during a Financial Crisis

This paper studies the effect of credit supply shocks on aggregate labor productivity during a financial crisis. Using data on the universe of Italian manufacturing firms, we decompose aggregate productivity growth in changes in average productivity of incumbents, labor share reallocation among incumbents, entry, and exit. We estimate the impact of industry-specific exogenous credit supply shocks on each component. We find that credit supply tightening entails a drop in average productivity, counterbalanced by the reallocation of labor towards more productive firms, and no significant effect on the contribution of entry and exit to productivity growth. The offsetting response of reallocation is stronger in ex ante more financially constrained industries.