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

Decio Coviello; Immacolata Marino; Tommaso Nannicini; Nicola Persico

doi:10.1093/ej/ueab073

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

Managerial Economics, Decision Sciences and Operations

Research output: Contribution to journal › Article › peer-review

5 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 language	English (US)
Pages (from-to)	582-617
Number of pages	36
Journal	Economic Journal
Volume	132
Issue number	642
DOIs	https://doi.org/10.1093/ej/ueab073
State	Published - Feb 1 2022

ASJC Scopus subject areas

Economics and Econometrics

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10.1093/ej/ueab073

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AU - Persico, Nicola

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

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