Firms' Internal Networks and Local Economic Shocks

Abstract

This paper shows that firms spread the adverse impacts of local employment shocks across regions through their internal networks of establishments. Linking confidential micro data at the establishment level from the U.S. Census Bureau’s Longitudinal Business Database to ZIP code-level variation in house price changes during the Great Recession, we find that local establishment-level employment responds strongly to employment shocks in other regions in which the firm has establishments. Consistent with theory, the elasticity of establishment-level employment with respect to shocks in other regions is increasing with firms’ financial constraints. Moreover, establishments belonging to more expansive firm networks exhibit smaller employment elasticities with respect to their own local shocks. To account for the impacts of general equilibrium adjustments, we examine aggregate employment at the county level. Similar to what we found at the establishment level, we obtain large elasticities of county-level employment with respect to employment shocks in other counties linked through firms’ internal networks. Overall, our results suggest that firms play an important role in the provision of regional risk sharing and the propagation of local employment shocks across different U.S. regions.