Does Firm Investment Respond to Peers' Investment?
55 Pages Posted: 23 Aug 2016 Last revised: 3 Aug 2017
Date Written: August 2, 2017
Yes, it responds positively. Using a new instrumental variable based on the presence of location specific information externalities, we estimate that firms increase investment by 10% in response to a one standard-deviation increase in the investment of their product market peers. The influence of peers' investment is stronger in concentrated industries, featuring more heterogeneous firms, and for relatively smaller firms that possess less precise information. These findings are consistent with a model in which firms compete and use peers' investment as a source of information about product market fundamentals. The positive influence of peers' investment could amplify variation in aggregate investment and thus affect productivity and output.
Keywords: investment, peer effect, competition, agglomeration economies
JEL Classification: G31
Suggested Citation: Suggested Citation