Industry Networks and the Geography of Firm Behavior

We consider the role of local geographic peers in determining equilibrium firm behavior. We exploit in-transitivity in local peer-firm networks and utilize spatial econometric techniques to circumvent well-known challenges in estimating and interpreting empirical models of peer effects. We find that geography network effects play a highly significant causal role in explaining corporate investment decisions, and these effects play a much more modest role in explaining financial policies and firm performance. We then implement a novel structured network regression to separately identify the effects of geography, product markets, and supply-chain networks. We find that local externalities in firm behavior operate almost exclusively within industry boundaries, and geographic effects outside industry boundaries are moderately evident only for corporate investment decisions