Big fish in a small pond: Locally dominant firms and the business cycle

Abstract

Following Gabaix (2011), we identify locally dominant firms that have a strong impact on their local macroeconomic environment, but are not among the largest 100 U.S. firms. Idiosyncratic shocks to these locally dominant firms propagate nationally and explain a significant portion of aggregate U.S. macroeconomic fluctuations. Specifically, we find that locally dominant firms exist in 13 U.S. states and productivity shocks to these firms explain almost 50% of the U.S. GDP growth.