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Can Government Demand Stimulate Private Investment? Evidence from U.S. Federal Procurement

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  • Mr. Shafik Hebous
  • Tom Zimmermann

Abstract

We study the effects of federal purchases on firms’ investment using a novel panel dataset that combines federal procurement contracts in the United States with key financial firm-level information. We find that 1 dollar of federal spending increases firms’ capital investment by 7 to 11 cents. The average effect masks heterogeneity: Effects are stronger for firms that face financing constraints and they are close to 0 for unconstrained firms. In line with the financial accelerator model, our findings indicate that the effect of government purchases works through easing firms’ access to external borrowing. Furthermore, 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.

Suggested Citation

  • Mr. Shafik Hebous & Tom Zimmermann, 2016. "Can Government Demand Stimulate Private Investment? Evidence from U.S. Federal Procurement," IMF Working Papers 2016/060, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:2016/060
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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.
    2. Awad Ali Alanzi, 2021. "Saudi Procurement System and Regulations: Overview of Local and International Administrative Contracts," Laws, MDPI, Open Access Journal, vol. 10(2), pages 1-15, May.
    3. Caravella, Serenella & Crespi, Francesco & Guarascio, Dario & Tubiana, Matteo, 2020. "Competitive strategies, heterogeneous demand sources and firms’ growth trajectories," GLO Discussion Paper Series 442, Global Labor Organization (GLO).
    4. Bernard Hoekman & Marco Sanfilippo, 2020. "Foreign participation in public procurement and firm performance: evidence from sub-Saharan Africa," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 156(1), pages 41-73, February.

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    More about this item

    Keywords

    WP; capital investment; book value; firm FE; external borrowing; Investment; Federal Procurement; Financing Constraints; Spending Multipliers; awarded firm-quarter contract; firm level; constrained firm; firm-quarter level; stock market information; investment response; firm size; Capital spending; Credit ratings; Currencies; Private investment;
    All these keywords.

    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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