Abstract
This paper shows that the large common component of investment among firms in the same product market is partly due to peer effects. We estimate the influence of peers' investment using an instrumental variables approach based on the presence of local agglomeration externalities. On average, firms increase investment by 10% in response to a one standard deviation increase in the average investment of their product market peers. Moreover, the influence of peers is stronger in concentrated industries, industries with more heterogeneous firms, and for relatively smaller firms with less precise information. These findings are consistent with a strategic model in which the investments of peers provide relevant information about product market fundamentals. The positive influence of peers' investment could amplify variation in aggregate investment and thus affect aggregate productivity and output.
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