Geography of Firms and Propagation of Local Economic Shocks

Abstract:     
This study shows that the geographical distribution of publicly-traded firms generates an economic network that links the economic environments of all U.S. states. Using a novel measure of economic linkages among publicly-traded firms, we build a geographical network of state-level economic connections and show that local economic shocks propagate through this economic network. Specifically, for each state, we identify U.S. states that are economically relevant for firms headquartered in that state and show that economic conditions in economically relevant states predict the economic environment in the headquarters state. The evidence of predictability is stronger if two states are culturally similar but remains unaffected by geographical or industrial proximity. These results do not merely reflect the impact of omitted common national macroeconomic shocks. Using monetary losses from state-level natural disasters as an instrument, we show that state-level economic shocks propagate through the economic network generated by public companies.

Number of Pages in PDF File: 59

Keywords: local business cycles, geographical networks, economic links, publicly-traded firms, propagation of recessions

JEL Classification: C23, E32, E37, G10

working papers series