Handling Spillover Effects in Empirical Research: An Application using Credit Supply Shocks

Abstract

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.