The Effect of Public Spending on Private Investment

Taehyun Kim and Quoc H Nguyen

Review of Finance, 2020, vol. 24, issue 2, 415-451

Abstract: We examine the causal impact of public-sector spending on corporate investment. Making use of population count revisions in census years as exogenous shocks to the cross-sectional allocation of federal funds, we find that increases in federal spending reduce firms’ investment, R&D spending, employment growth, sales growth, and firm-level equity volatility. The effect is stronger for firms that are labor-intensive, smaller, geographically concentrated, financially constrained, or in regions with higher employment or more generous unemployment insurance benefits. We find that exogenous increases in government hiring reduce corporate hiring, and positive federal spending shocks reduce the flow of workers from the public-sector to the private sector. Overall, our results show that positive government spending reduces corporate investment by hurting firms’ investment opportunity sets and highlight the significant role of the labor market as an underlying mechanism.

Keywords: Firm investment; Fiscal policy; Crowding out; Labor (search for similar items in EconPapers)
JEL-codes: G31 G38 H32 J01 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (6)

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