Corporate competitive externalities of US government financial assistance

We investigate the competitive consequences of government financial assistance by examining non-assisted firms operating in the same product market as assisted firms. Using a novel dataset of U.S. federal, state, and local government assistance to U.S. public firms, we find that increases in government assistance to competitors are associated with a 12.2% decrease in nonassisted firms’ financial performance. The decline in financial performance is driven by decreasing revenues and increasing research and development expenses. Results are more pronounced for financially constrained firms, and concentrated in permanent government assistance in the form of cash grants, cost reimbursements, and tax abatements/credits (rather than temporary assistance in the form of loans). We further show that greater competitor assistance is associated with a 5.1% decline in market share, particularly in less competitive markets. Overall, the evidence indicates that government assistance generates negative competitive externalities for non-assisted firms - a potentially unintended and previously unexplored consequence of government intervention that benefits some firms at the competitive expense of others.