Consumer of Last Resort: Government procurement, firm-levelevidence and the macroeconomy

Public spending has been shown to stimulate private consumption and aggregate output. Less is known about the extent to which public demand and procurement markets can affect individual firms, particularly their financial stability and resilience to shocks, and can re-balance risks across businesses in the economy. In this paper, I focus on these issues and investigate them both empirically and theoretically. To do so, I first build a novel database with firm-level data on US government procurement programs and establish the unpredictability of competitive contracts through an event study. I then explore the effects of procurement contracts on firms’ balance sheets and find a significant positive impact on winning firms’ sales, profits and investments. I contribute to the literature by showing that public procurement can dampen perceived uncertainty and volatility associated with the firm in times of stringent financial conditions. I generalise and confirm my empirical findings in a general equilibrium model with two types of firms, contractors and outsiders. Using the theoretical model, I provide a deeper understanding of the design of procurement markets and their interplay with public policies to balance uncertainty and risks across firms.