EPRG 0823

Jevgenijs Steinbuks

Financial constraints and firms’ investment: results of a natural experiment measuring firm response to power interruption

EPRG 0823 Non-Technical Summary | PDF

Abstract: This study uses the observed differences between public system failures and private investment as a natural experiment to reveal the effect of financing constraints on firms’ ability to substitute specifically for deficient public services and more generally to acquired complementary capital. The analysis of the firm-level data from Sub-Saharan Africa shows that, controlling for other factors, firms with a better access to credit are also more likely to invest into private substitutes when public services are deficient. Consistent with the predictions of the theoretical model these findings indicate that financing constraints have a significant impaction on firms’ ability to deal with poor public capital.

Keywords: Financing Constraints, Complementary Capital, Natural Experiment, Sub-Saharan Africa

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