We study the effect of a persistent demand shock on corporate factor utilisation. Our identification strategy leverages a legislative change designed to permanently reduce spending in certain targeted municipalities. This change generates an arguably exogenous drop in the revenue of procurement firms, which differs depending on each firm’s reliance for its revenue on procurement in the targeted municipalities. We find that firms responded to the demand shock by cutting capital rather than labour. We propose a theoretical mechanism based on the irreversibility of capital investment.
Demand Shocks and Firm Investment: Micro-evidence from fiscal retrenchment in Italy / Coviello, Decio; Marino, Immacolata; Nannicini, Tommaso; Persico, Nicola. - In: ECONOMIC JOURNAL. - ISSN 1468-0297. - 132:642(2022), pp. 810-834. [10.1093/ej/ueab073]
Demand Shocks and Firm Investment: Micro-evidence from fiscal retrenchment in Italy
Immacolata Marino;
2022
Abstract
We study the effect of a persistent demand shock on corporate factor utilisation. Our identification strategy leverages a legislative change designed to permanently reduce spending in certain targeted municipalities. This change generates an arguably exogenous drop in the revenue of procurement firms, which differs depending on each firm’s reliance for its revenue on procurement in the targeted municipalities. We find that firms responded to the demand shock by cutting capital rather than labour. We propose a theoretical mechanism based on the irreversibility of capital investment.I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.
