Detecting propagation effects by observing aggregate distributions : the case of lumpy investments

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.