Does Government Spending Crowd Out R&D Investment? Evidence from Government-Dependent Firms and Their Peers
126 Pages Posted: 21 Mar 2015 Last revised: 22 Jun 2020
Date Written: June 20, 2020
We provide evidence that managerial incentives to manipulate real activities can influence the effectiveness of fiscal policy. Increases in federal spending lead government-dependent firms to expand R&D investment whereas industry-peer firms contract. The net result is a reduction in industry-level R&D investment. We find evidence of a novel mechanism for the crowding out of peer-firm investment: peer-firm managers respond to falling relative performance by cutting R&D to manage current earnings upward. We show that these differential responses manifest in firm value. These findings are robust to endogeneity and selection concerns as well as a battery of alternative explanations.
Keywords: federal budget, government-dependent firms, peer-firms, R&D, crowding out
JEL Classification: G31, G32, G38, H32, M41, P16
Suggested Citation: Suggested Citation