Demand Shocks and Firm Investment: Micro-Evidence from Fiscal Retrenchment in Italy

Decio Coviello, Immacolata Marino, Tommaso Nannicini, Nicola Persico*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

2 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)582-617
Number of pages36
JournalEconomic Journal
Volume132
Issue number642
DOIs
StatePublished - Feb 1 2022

ASJC Scopus subject areas

  • Economics and Econometrics

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