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

Despite their importance, the discussion of spillover effects in empirical research misses the rigor dedicated to endogeneity concerns.

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Tobias Berg (Frankfurt School of Finance & Management)

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IWH conference room

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Tobias Berg is Associate Professor of Finance at Frankfurt School of Finance & Management. He was previously Assistant Professor of Finance at the University of Bonn and a visiting scholar at the Stern School of Business, New York University (NYU) as well as the European Central Bank. Prior to that he worked as Project Leader at the Boston Consulting Group. Tobias Berg works in the area of financial intermediation and corporate finance and focuses on risk management, bank regulation, and real effects of financial intermediation.

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Despite their importance, the discussion of spillover effects in empirical research misses the rigor dedicated to endogeneity concerns. We show that i) even with random treatment, spillovers lead to an intricate bias in estimating treatment effects, ii) there is a trade-off between endogeneity and spillover concerns, iii) the current practice of using individual level regressions to identify direct effects and aggregate level regressions to learn about spillover effects can lead to misleading conclusions. We develop a simple guidance for empirical researchers, apply it to a credit supply shock, and highlight differences in the results compared to current empirical practice.