Financial Constraints and Asset Reallocation: Evidence from Farming and Fracking
- Richard T. Thakor - MIT
- 18 avr. 2016
- 2 min de lecture
Richard Thakor won the 2016 MIT Sloan thesis prize for demonstrating that limiting financial constraints on a business can reduce the misallocation of assets and trigger economic growth.
The paper, “Financial Constraints and Asset Reallocation: Evidence from Farming and Fracking [PDF],” examined how Oklahoma’s exponential growth in oil fracking wells has impacted the finances as well as the productivity of the state’s farmers. Thakor found that farmers who leased a portion of their land to oil companies for fracking used the money—typically $10,000 per acre per year—to buy off debt or purchase additional acreage.
These farmers increased wheat yields on their new land by 12 percent and profits by 15 percent, which Thakor said is consistent with the increased efficiency effect. The findings also suggest that small business owners, as well as larger firms operating in markets where skills are fixed, might be able to reap the financial benefits of the asset reallocation effect, he added.
How do financial constraints affect asset allocation, and consequently productivity and asset values? Using a unique dataset of agricultural outcomes, I explore how farmers respond to exogenous cash inflows caused by an expansion of hydraulic fracturing (fracking) leases. Farmers who receive positive cash flow shocks increase their purchases of land, 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, when farmers in low-productivity counties receive positive cash flow shocks, they do not engage in similar behavior. Moreover, farmers increase their purchases of vacant (undeveloped) land. Average output, productivity, and profits all increase following these positive cash flow shocks, and farmland prices also rise. These effects are broadly consistent with an efficient reallocation of land towards more productive users. Finally, I show that farmers borrow relatively less following the cash flow shock.
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