Subcontracting in Federal Spending: Micro and Macro Implications

Geumbi Park (), Xiaoqing Zhou and Sarah Zubairy

No 2535, Working Papers from Federal Reserve Bank of Dallas

Abstract: This paper studies the critical but underexplored role of subcontracting in shaping the spatial and firm-level effects of federal government spending, introducing a new channel through which fiscal shocks propagate. Using newly available data on defense subcontracts merged with firm-level data, we document that a substantial share of spending is reallocated via subcontracts across regions beyond what is implied by the location of prime contracts. Firm-to-firm flows further show that subcontracting redirects spending toward large, goods-producing firms. We develop an empirical strategy that accounts for this reallocation and separately identifies the local effects of prime and subcontract spending. Accounting for subcontracting modestly raises prime-contract multipliers, while subcontract multipliers are substantially smaller. Firm-level evidence shows that this gap reflects both compositional differences and the inherently less stable nature of subcontracting relationships. We build a spatial multi-region model with prime-subcontracting networks to rationalize these findings. Our analysis suggests that subcontracting constitutes an important margin of fiscal transmission and that its rise weakens the transmission of government spending to local labor markets.

Keywords: local multipliers; prime contracts; subcontracts; employment; firm dynamics (search for similar items in EconPapers)
JEL-codes: E62 H30 H56 H57 (search for similar items in EconPapers)
Pages: 70
Date: 2025-09-22, Revised 2026-05-12
New Economics Papers: this item is included in nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.dallasfed.org/~/media/documents/research/papers/2025/wp2535r1.pdf Full text (application/pdf)

Related works:
Working Paper: Subcontracting in Federal Spending: Micro and Macro Implications (2026)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:feddwp:101769

Ordering information: This working paper can be ordered from

DOI: 10.24149/wp2535r1

Access Statistics for this paper

More papers in Working Papers from Federal Reserve Bank of Dallas Contact information at EDIRC.
Bibliographic data for series maintained by Amy Chapman ().