Seed Capital: The Impact of Agricultural Output on Local Economic Activity in India

Type Working Paper
Title Seed Capital: The Impact of Agricultural Output on Local Economic Activity in India
Author(s)
Publication (Day/Month/Year) 2012
URL http://www.dartmouth.edu/~neudc2012/docs/paper_297.pdf
Abstract
To what extent do firms rely on rural output for demand and capital? We provide new evidence on this classic development question by examining the impact of agricultural output on local economic activity. Rainfall provides exogenous and significant variation in rural earnings. We find that such fluctuations have a lasting impact on urban firms, with effects concentrated in the manufacturing sector. Using variation in both location and industry characteristics of firms, we demonstrate that the evidence best supports a capital channel by which rural surplus provides capital to small, credit-constrained manufacturing enterprises. We argue that given these constraints, a complete understanding of the impact of agriculture must assess changes in both rural and nearby urban firms.

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