Demand shocks and firm investment micro-evidence from fiscal retrenchment in Italy Decio Coviello, Immacolata Marino, Tommaso Nannicini, Nicola Persico
Contributor(s): Coviello, Decio
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Material type: 
ArticleSubject(s): GASTO PUBLICO LOCAL | TRIBUTOS LOCALES | REDUCCIONES TRIBUTARIAS | COLABORACIÓN PÚBLICO - PRIVADA | EMPRESAS | CONTRATOS ADMINISTRATIVOS | ITALIA
In:
The Economic Journal v. 132, n. 642, February 2022, p. 582-617Summary: 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.
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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.
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