Detecting Propagation Effects by Observing Aggregate Distributions: The Case of Lumpy Investments

Luigi Guiso, Chaoqun Lai and Makoto Mirei
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Chaoqun Lai: Utah State University
Makoto Mirei: Hitotsubashi University

No 1112, EIEF Working Papers Series from Einaudi Institute for Economics and Finance (EIEF)

Abstract: By using an extensive panel data set of Italian firms, we show empirically that the fraction of firms that engage in a lumpy investment follows a non-normal, double-exponential distribution across region-year. We propose a simple sectoral model that generates the double-exponential distribution that arises from the complementarity of the firms' lumpy investments within a region. We calibrate the degree of complementarity by estimating an individual firm's behavior with the firm-level data. Simulations show that the degree of complementarity estimated at the firm level is consistent with the double-exponential fluctuations observed at the aggregate level.

Pages: 47 pages
Date: 2011, Revised 2011-06
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Working Paper: Detecting Propagation Effects by Observing Aggregate Distributions: The Case of Lumpy Investments (2011)
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