Labor Scarcity, Finance, and Innovation: Evidence from Antebellum America

This paper provides new evidence on how access to finance impacts technological innovation and establishes the role of labor practices in shaping the finance-innovation nexus. We exploit antebellum America, a unique setting where staggered adoption of free banking laws across states encouraged bank entry, and regional divergence in the use of exploited workers generated heterogeneity in agricultural labor cost. We find that greater access to finance spurred innovation, but the positive effect on agricultural innovation diminished with the extent of labor exploitation. Where exploitative labor practices were pervasive, free banking aggravated labor exploitation, reduced labor cost, and impeded agricultural innovation.