Description

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.

More publications in this series: Working Papers

More publications by: Shafik Hebous ; Tom Zimmermann