Capital Allocation Across Sectors: Evidence from a Boom in Agriculture

Tuesday, 22 November, 2016
In this working paper Bustos, Garber and Ponticelli (2016) study the allocation of capital across sectors and regions. In particular, they assess to what extent growth in agricultural profits can lead to an increase in the supply of credit in industry and services. For this purpose, the authors identify an exogenous increase in agricultural profits due to the adoption of genetically engineered soy in Brazil. The new agricultural technology had heterogeneous effects in areas with different soil and weather characteristics. They find that regions with larger increases in agricultural profitability experienced increases in local bank deposits. However, there was no increase in local bank lending. Instead, capital was reallocated towards other regions through bank branch networks. Regions with more bank branches receiving funds from soy areas experienced both an increase in credit supply and faster growth of small and medium sized firms.