Spillovers in Industrial Districts

Abstract

We study the role of social interaction (SI) in determining firms’ employment adjustments in industrial districts. We assume that SI matters only among firms that are both similar and geographically close. Our first test of this assumption is based on the correlation between individual and aggregate measures of employment adjustments. Exploiting the richness of our data, we directly address the problems of self-selection and unobserved common shocks that plague most of the empirical literature. Our second test shows that, as theory predicts, spillovers give rise to amplified responses to shocks and bunching of adjustments. This gives further support to the role of SI in industrial clusters and suggests that information spillovers, according to which firms’ actions convey useful information about a common problem, are one of the channels through which they take place.