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

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Listed:
  • Decio Coviello
  • Immacolata Marino
  • Tommaso Nannicini
  • Nicola Persico

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.

Suggested Citation

  • Decio Coviello & Immacolata Marino & Tommaso Nannicini & Nicola Persico, 2022. "Demand Shocks and Firm Investment: Micro-Evidence from Fiscal Retrenchment in Italy," The Economic Journal, Royal Economic Society, vol. 132(642), pages 582-617.
    • Handle: RePEc:oup:econjl:v:132:y:2022:i:642:p:582-617.
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    File URL: http://hdl.handle.net/10.1093/ej/ueab073
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    Cited by:

    1. Sebastian Blesse & Florian Dorn & Max Lay, 2023. "Do Fiscal Rules Undermine Public Investments? A Review of Empirical Evidence," ifo Working Paper Series 393, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    2. Sebastian Blesse & Florian Dorn & Max Lay, 2023. "Schwächen Fiskalregeln öffentliche Investitionen?," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 76(06), pages 22-28, June.
    3. Niklas Potrafke, 2023. "The Economic Consequences of Fiscal Rules," CESifo Working Paper Series 10765, CESifo.
    4. Bernard Hoekman & Marco Sanfilippo & Filippo Santi, 2022. "Government Demand and Domestic Firms Growth: Evidence from Uganda," RSCAS Working Papers 2022/54, European University Institute.

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