Information Spillovers and Factor Adjustment

Abstract

We investigate the role of information spillovers (IS) in determining firms' labor adjustments. We test the proposition that information on relevant state variables spills over through one firm's decision to those of other firms, assuming that spillovers matter only among firms that are both similar and geographically close. From a large panel of manufacturing firms, we select those that are located in a given industrial district and produce the same goods. We propose a solution to the identification problemtypical of the empirical analysis of social effects. Our results show that firms' decisions are indeed affected by those of similar, neighboring firms, while the actions of firms not satisfying either of the criteria have no impact. We test other implications of the theory and find further supporting evidence of the relevance of IS. First, measures of extreme adjustments exert a stronger influence than mean adjustments; second, smaller firms seem to rely more on external sources of information; third, the effects depend on such characteristics of the reference group as its size and the presence of large firms. Finally, given that firms exposed to IS tend to adjust simultaneously, we find that spillovers amplify the effect of aggregate shocks and constitute a powerful mechanism of amplification of the business cycle.