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

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  • Shafik Hebous
  • Tom Zimmermann

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).

Suggested Citation

  • Shafik Hebous & Tom Zimmermann, 2019. "Can government demand stimulate private investment? Evidence from U.S. federal procurement," CESifo Working Paper Series 7534, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_7534
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    File URL: https://www.cesifo-group.de/DocDL/cesifo1_wp7534.pdf
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    Cited by:

    1. Hoekman, Bernard & Sanfilippo, Marco, 2018. "Firm performance and participation in public procurement: Evidence from Sub-Saharan Africa," CEPR Discussion Papers 12752, C.E.P.R. Discussion Papers.

    More about this item

    Keywords

    investment; federal procurement; financing constraints; spending; multipliers;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • E69 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Other

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