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Do Powerful Politicians Cause Corporate Downsizing?

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  • Lauren Cohen
  • Joshua Coval
  • Christopher Malloy
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    Abstract

    This paper employs a new empirical approach for identifying the impact of government spending on the private sector. Our key innovation is to use changes in congressional committee chairmanships as a source of exogenous variation in state-level federal expenditures. We show that fiscal spending shocks appear to significantly dampen corporate investment activity. This retrenchment occurs within large and small states and is most pronounced among geographically concentrated firms. The effects are economically meaningful, and the mechanism—entirely distinct from interest rate and tax channels—suggests new considerations in assessing the impact of government spending on private-sector economic activity.

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    File URL: http://www.jstor.org/stable/pdfplus/10.1086/664820
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    File URL: http://www.jstor.org/stable/full/10.1086/664820
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    Bibliographic Info

    Article provided by University of Chicago Press in its journal Journal of Political Economy.

    Volume (Year): 119 (2011)
    Issue (Month): 6 ()
    Pages: 1015 - 1060

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    Handle: RePEc:ucp:jpolec:doi:10.1086/664820

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    Web page: http://www.journals.uchicago.edu/JPE/

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    Cited by:
    1. Carlino, Gerald A. & Inman, Robert P., 2014. "Macro fiscal policy in economic unions: states as agents," Working Papers 14-20, Federal Reserve Bank of Philadelphia.
    2. Belo, Frederico & Gala, Vito D. & Li, Jun, 2013. "Government spending, political cycles, and the cross section of stock returns," Journal of Financial Economics, Elsevier, vol. 107(2), pages 305-324.
    3. Cohen, Lauren & Diether, Karl & Malloy, Christopher, 2013. "Legislating stock prices," Journal of Financial Economics, Elsevier, vol. 110(3), pages 574-595.
    4. Blomquist , Johan & Nordin, Martin, 2013. "Do the CAP Subsidies Increase Employment in Sweden? Estimating the Open Economy Relative Multiplier Using an Exogenous Change in the CAP," Working Papers 2013:41, Lund University, Department of Economics.
    5. Duchin, Ran & Sosyura, Denis, 2014. "Safer ratios, riskier portfolios: Banks׳ response to government aid," Journal of Financial Economics, Elsevier, vol. 113(1), pages 1-28.
    6. Emi Nakamura & J?n Steinsson, 2014. "Fiscal Stimulus in a Monetary Union: Evidence from US Regions," American Economic Review, American Economic Association, vol. 104(3), pages 753-92, March.
    7. Gropper, Daniel M. & Jahera, John S. & Park, Jung Chul, 2013. "Does it help to have friends in high places? Bank stock performance and congressional committee chairmanships," Journal of Banking & Finance, Elsevier, vol. 37(6), pages 1986-1999.
    8. Daniel Shoag, 2013. "Using State Pension Shocks to Estimate Fiscal Multipliers since the Great Recession," American Economic Review, American Economic Association, vol. 103(3), pages 121-24, May.
    9. Lauren Cohen & Karl B. Diether & Christopher Malloy, 2012. "Legislating Stock Prices," NBER Working Papers 18291, National Bureau of Economic Research, Inc.
    10. Amore, Mario Daniele & Bennedsen, Morten, 2013. "The value of local political connections in a low-corruption environment," Journal of Financial Economics, Elsevier, vol. 110(2), pages 387-402.

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