Does Firm Investment Respond to Peers' Investment?
Robert H. Smith School Research Paper No. RHS 2827803
56 Pages Posted: 26 May 2020 Last revised: 25 Apr 2022
Date Written: December 21, 2017
We study whether, how, and why the investment of a firm depends on the investment of other firms in the same product market. Using an instrumental variable based on the presence of local knowledge externalities, we find a sizeable complementarity of investment among product market peers, holding across a large majority of sectors. Peer effects are stronger in concentrated markets, featuring more heterogeneous firms, and for smaller firms with less precise information. Our findings are consistent with a model in which managers are imperfectly informed about fundamentals and use peers' investments as a source of information. Product market peer effects in investment could amplify shocks in production networks.
Keywords: investment, peer effect, competition, agglomeration economies
JEL Classification: G31
Suggested Citation: Suggested Citation