Striking While the Iron is Cold: Fragility after a Surge of Lumpy Investments

This paper studies how large firms’ synchronized lumpy investments endogenously shape an economy’s fragility to negative TFP shocks. I develop a heterogeneous-firm real business cycle model that matches the empirical interest rate elasticities of investment for both large and small firms. In the model, large firms’ lumpy investments become persistently synchronized due to their low sensitivity to general equilibrium effects, generating investment surges. Following these surges, TFP-induced recessions are particularly severe, and the semi-elasticity of aggregate investment drops significantly, consistent with the data.