Financial Market Reform, Investment Choices and Agricultural TFP: Evidence from Cross-State Analysis in the United States

This paper investigates the effects of financial reforms on agricultural productivity in the United States following the farm crisis. We propose a theoretical framework demonstrating how banking deregulation reallocates farmers’ resources from financial capital assets to agricultural production, reducing unit costs and elevating total factor productivity (TFP). Empirically, we leverage the staggered rollout of interstate and intrastate banking deregulation across the 1970s to 1990s. Our results reveal that interstate deregulation depresses returns on financial assets, prompting capital shifts toward agriculture. Although expanded farm scale increases marginal costs, lower input prices — driven by deregulation—shift the average cost curve downwards. Consequently, state-level agricultural TFP rises with the magnitude being 6.7%, explaining one-quarter of post-crisis TFP growth. By elucidating a novel channel linking financial reforms to productivity via capital reallocation, this study offers new perspectives on the macroeconomic implications of banking deregulation.

Yu Sheng is currently a Professor and the Crawford Chair in Agricultural Economics at Crawford School of Public Policy, Australian National University. Additionally, he also serves as the President of the East Asia branch of the Australasian Agricultural and Resource Economics Society (AARES), is the former Vice-President of the Asian Society of Agricultural Economists (ASAE), the Co-Editor of the Australian Journal of Agricultural and Resource Economics (AJARE), and an associated editor of Journal of Productivity Analysis. Since 2011, he has published more than 50 journal articles including many in top-tier journals such as American Journal of Agricultural Economics; Energy Economics; Journal of International Money and Finance; Canadian Journal of Economics; Review of Income and Wealth; World Development; and Australian Journal of Agricultural and Resource Economics. Professor Yu Sheng also teaches a number of courses for both undergraduates and graduates, including advanced agricultural economics, managerial economics, and quantitative international economics at Peking University, and microeconomics and macroeconomics at the Hong Kong Polytech University. Finally, he has also been actively collaborating with leading academics and institutions including ERS-USDA, OECD and IFPRI etc.