Big Fish in a Small Pond: The Economic Effects of Locally-Dominant Firms

Abstract

Understanding the origins of macroeconomic fluctuations has been an important long-standing question. To address this issue, we rotate the point of interest from the U.S. economy to U.S. state. We show that idiosyncratic shocks to locally-dominant firms, that are not among U.S. top 100 firms, explain a significant part of local economy rise and fall. More importantly, we find that idiosyncratic shocks to locally-dominant firms explain 50% of U.S. GDP growth. This effect is significantly larger than the previously identified in the literature. Our findings suggest that locally-dominant firms, which are big fish in a small pond, can have larger aggregate effects than nationally-dominant firms.