Handling Spillover Effects in Empirical Research
66 Pages Posted: 23 May 2019 Last revised: 29 Oct 2020
Date Written: October 29, 2020
Despite their importance, the discussion of spillover effects in empirical research often misses the rigor dedicated to endogeneity concerns. We analyze a broad set of workhorse models of firm interactions and show that spillovers naturally arise in many corporate finance settings. This has important implications for the estimation of treatment effects: i) even with random treatment, spillovers lead to an intricate bias, ii) fixed effects can exacerbate the spillover-induced bias. We develop guidance for empirical researchers, use our method to analyze the effect of a credit supply shock on employment, and highlight differences in results compared to current empirical practice.
Keywords: Spillovers, Cournot, Salop, Agglomeration, Demand Spillovers, Direct vs. Indirect Effects, Credit Supply
JEL Classification: C13, C21, G21, G32, R11, R23, M41, M42
Suggested Citation: Suggested Citation