Can government demand stimulate private investment? Evidence from U.S. federal procurement

Shafik Hebous and Tom Zimmermann

No 7534, CESifo Working Paper Series from CESifo

Abstract: We study the effects of federal purchases on firm investment using a novel panel dataset that combines federal procurement contracts in the United States with key financial firm-level information. Using panel fixed-effect models, propensity score matching, and inverse probability weighting estimation techniques, we find that 1 dollar of federal spending increases firms’ capital investment by 10 to 13 cents. In line with the financial accelerator model, our findings indicate that the effect of government purchases works through easing firms’ access to external borrowing. In particular, the effect is stronger for firms that face financing constraints and it is insignificant for unconstrained firms. Moreover, an industry-level analysis suggests that that the increase in investment at the firm level translates into an industry-wide effect without crowding-out capital investment of other firms in the same industry. Overall, our findings lend support to recent evidence on local multipliers in that increases in regional outputs should ultimately be reflected in firm balance sheets (demand for capital).

Keywords: investment; federal procurement; financing constraints; spending; multipliers (search for similar items in EconPapers)
JEL-codes: E62 E69 H32 (search for similar items in EconPapers)
Date: 2019
New Economics Papers: this item is included in nep-fdg and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Can government demand stimulate private investment? Evidence from U.S. federal procurement (2021)
Working Paper: Can Government Demand Stimulate Private Investment? Evidence from U.S. Federal Procurement (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_7534

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