Firm heterogeneity and regional business cycles differentials

Abstract

We analyze the effect of firm heterogeneity on regional business cycle differentials. Using monthly firm-level data for Italy and estimating discrete-response models, we document sizeable and countercyclical differences in amplitude between the Northern and the Southern business cycles. We explore the role of sectoral mix and several firm-specific factors in explaining regional business cycle gaps. Results suggest that regional differences in sectoral composition are not responsible for these discrepancies, whereas firm-level heterogeneity explains 50% of the North–South gap. These results are robust to controlling for (i) firm fixed effects, (ii) spatial fixed effects and (iii) simultaneity bias.

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