IDEAS home Printed from https://ideas.repec.org/p/fip/feddwp/101769.html
   My bibliography  Save this paper

Subcontracting in Federal Spending: Micro and Macro Implications

Author

Listed:
  • Geumbi Park

  • Xiaoqing Zhou
  • Sarah Zubairy

Abstract

This paper studies the critical but underexplored role of subcontracting in shaping the spatial and firm-level effects of federal government spending. Leveraging newly available data on defense subcontract awards since 2011, linked with NETS establishment-level data, we examine prime–subcontractor relationships across counties, industries and time. We document three stylized facts: (1) subcontracting leads to widespread geographic relocation of federal dollars; (2) it reallocates spending across sectors, notably from service-sector primes to manufacturing subcontractors; and (3) large firms dominate subcontracting networks, even receiving subawards from smaller primes. Accounting for this geographic relocation shows that conventional estimates understate local multiplier effects by approximately 20%. While subcontracting broadens the spatial reach of federal spending, its average local impact is smaller than that of prime contracts. Establishment-level evidence shows that subcontractors—especially large ones and those in goods sectors—exhibit weaker and less persistent employment and revenue gains than prime contractors, reflecting the shorter and less stable nature of subcontracts. These weaker multipliers also stem from the skewed distribution of subcontracts toward large manufacturers. Overall, our findings reveal substantial heterogeneity in how procurement opportunities diffuse through the private sector and shape the effects of federal spending.

Suggested Citation

  • Geumbi Park & Xiaoqing Zhou & Sarah Zubairy, 2025. "Subcontracting in Federal Spending: Micro and Macro Implications," Working Papers 2535, Federal Reserve Bank of Dallas.
    • Handle: RePEc:fip:feddwp:101769
    DOI: 10.24149/wp2535
    as

    Download full text from publisher

    File URL: https://www.dallasfed.org/~/media/documents/research/papers/2025/wp2535.pdf
    File Function: Full text
    Download Restriction: no
    File URL: https://libkey.io/10.24149/wp2535?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Valerie A. Ramey, 2011. "Identifying Government Spending Shocks: It's all in the Timing," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 126(1), pages 1-50.
    2. Dupor, Bill & Guerrero, Rodrigo, 2017. "Local and aggregate fiscal policy multipliers," Journal of Monetary Economics, Elsevier, vol. 92(C), pages 16-30.
    3. Hebous, Shafik & Zimmermann, Tom, 2021. "Can government demand stimulate private investment? Evidence from U.S. federal procurement," Journal of Monetary Economics, Elsevier, vol. 118(C), pages 178-194.
    4. Gabriel Chodorow-Reich, 2019. "Geographic Cross-Sectional Fiscal Spending Multipliers: What Have We Learned?," American Economic Journal: Economic Policy, American Economic Association, vol. 11(2), pages 1-34, May.
    5. Timothy J. Bartik, 1991. "Who Benefits from State and Local Economic Development Policies?," Books from Upjohn Press, W.E. Upjohn Institute for Employment Research, number wbsle.
    6. Henrique S. Basso & Omar Rachedi, 2021. "The Young, the Old, and the Government: Demographics and Fiscal Multipliers," American Economic Journal: Macroeconomics, American Economic Association, vol. 13(4), pages 110-141, October.
    7. 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 753-792, March.
    8. David Neumark & Brandon Wall & Junfu Zhang, 2011. "Do Small Businesses Create More Jobs? New Evidence for the United States from the National Establishment Time Series," The Review of Economics and Statistics, MIT Press, vol. 93(1), pages 16-29, August.
    9. Alan Auerbach & Yuriy Gorodnichenko & Daniel Murphy, 2020. "Local Fiscal Multipliers and Fiscal Spillovers in the USA," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 68(1), pages 195-229, March.
    10. Paul Goldsmith-Pinkham & Isaac Sorkin & Henry Swift, 2020. "Bartik Instruments: What, When, Why, and How," American Economic Review, American Economic Association, vol. 110(8), pages 2586-2624, August.
    11. John Haltiwanger & Ron S. Jarmin & Javier Miranda, 2013. "Who Creates Jobs? Small versus Large versus Young," The Review of Economics and Statistics, MIT Press, vol. 95(2), pages 347-361, May.
    12. Alessandro Barattieri & Matteo Cacciatore & Nora Traum, 2023. "Estimating the Effects of Government Spending Through the Production Network," NBER Working Papers 31680, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Poilly, Céline & Tripier, Fabien, 2025. "Regional trade policy uncertainty," Journal of International Economics, Elsevier, vol. 155(C).
    2. Thomas Gemert & Lenard Lieb & Tania Treibich, 2022. "Local fiscal multipliers of different government spending categories," Empirical Economics, Springer, vol. 63(5), pages 2551-2575, November.
    3. Ricardo Duque Gabriel & Mathias Klein & Ana Sofia Pessoa, 2023. "The Effects of Government Spending in the Eurozone," Journal of the European Economic Association, European Economic Association, vol. 21(4), pages 1397-1427.
    4. Berge, Travis & De Ridder, Maarten & Pfajfar, Damjan, 2021. "When is the fiscal multiplier high? A comparison of four business cycle phases," European Economic Review, Elsevier, vol. 138(C).
    5. Bessho, Shun-ichiro, 2021. "Local fiscal multipliers and population aging in Japan," Japan and the World Economy, Elsevier, vol. 60(C).
    6. Komarek, Timothy M. & Butts, Kyle & Wagner, Gary A., 2022. "Government Contracting, Labor Intensity, and the Local Effects of Fiscal Consolidation: Evidence from the Budget Control Act of 2011," Journal of Urban Economics, Elsevier, vol. 132(C).
    7. Yoon Joo Jo & Sarah Zubairy, 2025. "State-Dependent Government Spending Multipliers: Downward Nominal Wage Rigidity and Sources of Business Cycle Fluctuations," American Economic Journal: Macroeconomics, American Economic Association, vol. 17(1), pages 379-413, January.
    8. Ethan Ilzetzki, 2024. "Learning by Necessity: Government Demand, Capacity Constraints, and Productivity Growth," American Economic Review, American Economic Association, vol. 114(8), pages 2436-2471, August.
    9. Joonkyu Choi & Veronika Penciakova & Felipe Saffie, 2021. "Political Connections, Allocation of Stimulus Spending, and the Jobs Multiplier," FRB Atlanta Working Paper 2021-13, Federal Reserve Bank of Atlanta.
    10. Imai, Masami, 2022. "Local economic impacts of legislative malapportionment," Journal of Urban Economics, Elsevier, vol. 131(C).
    11. Bill Dupor & Guerrero Rodrigo, 2017. "The Aggregate and Relative Economic Effects of Government Financed Health Care," Working Papers 2017-27, Federal Reserve Bank of St. Louis.
    12. Benjamin Austin & Edward Glaeser & Lawrence Summers, 2018. "Jobs for the Heartland: Place-Based Policies in 21st-Century America," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 49(1 (Spring), pages 151-255.
    13. Komarek, Timothy M. & Wagner, Gary A., 2020. "The distributional effects of job loss from fiscal consolidation: Evidence from the Budget Control Act of 2011," Economics Letters, Elsevier, vol. 196(C).
    14. Kameda, Taisuke & Namba, Ryoichi & Tsuruga, Takayuki, 2021. "Decomposing local fiscal multipliers: Evidence from Japan," Japan and the World Economy, Elsevier, vol. 57(C).
    15. Valerie A. Ramey, 2020. "The Macroeconomic Consequences of Infrastructure Investment," NBER Chapters, in: Economic Analysis and Infrastructure Investment, pages 219-268, National Bureau of Economic Research, Inc.
    16. Jeremy Majerovitz & Karthik Sastry, 2023. "How Much Should We Trust Regional-Exposure Designs?," Working Papers 2023-018, Federal Reserve Bank of St. Louis.
    17. Raimondo Pala, 2025. "Identification, estimation and inference in Panel Vector Autoregressions using external instruments," Papers 2511.19372, arXiv.org.
    18. Cumming, Fergus, 2022. "Mortgage cash-flows and employment," European Economic Review, Elsevier, vol. 144(C).
    19. Marco Bernardini & Selien De Schryder & Gert Peersman, 2020. "Heterogeneous Government Spending Multipliers in the Era Surrounding the Great Recession," The Review of Economics and Statistics, MIT Press, vol. 102(2), pages 304-322, May.
    20. Zou, Yanchi, 2024. "The impact of fiscal stimulus on employment: Evidence from China’s four-trillion RMB package," Economic Modelling, Elsevier, vol. 131(C).

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • H56 - Public Economics - - National Government Expenditures and Related Policies - - - National Security and War
    • H57 - Public Economics - - National Government Expenditures and Related Policies - - - Procurement

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:feddwp:101769. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Amy Chapman (email available below). General contact details of provider: https://edirc.repec.org/data/frbdaus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.