The Effect of Public Spending on Private Investment: Evidence from Census Shocks

54 Pages Posted: 3 Sep 2015 Last revised: 16 Sep 2018

See all articles by Taehyun Kim

Taehyun Kim

University of Notre Dame - Department of Finance

Quoc Nguyen

DePaul University

Date Written: August 7, 2018

Abstract

We examine the causal impact of public-sector spending on corporate investment. Making use of population count revisions in census years as exogenous shocks to the cross-sectional allocation of federal funds, we find that increases in federal spending reduce firms’ investment, R&D spending, employment growth, sales growth, and firm-level equity volatility. The effect is stronger for firms that are labor-intensive, smaller, geographically concentrated, financially constrained, or in regions with higher employment or more generous unemployment insurance benefits. We find that exogenous increases in government hiring reduce corporate hiring, and positive federal spending shocks reduce the flow of workers from the public-sector to the private sector. Overall, our results show that positive government spending reduces corporate investment by hurting firms’ investment opportunity sets, and highlight the significant role of the labor market as an underlying mechanism.

Keywords: Firm investment, Fiscal policy, Labor

JEL Classification: G31, G38, H32, J01

Suggested Citation

Kim, Taehyun and Nguyen, Quoc, The Effect of Public Spending on Private Investment: Evidence from Census Shocks (August 7, 2018). Available at SSRN: https://ssrn.com/abstract=2654566 or http://dx.doi.org/10.2139/ssrn.2654566

Taehyun Kim

University of Notre Dame - Department of Finance ( email )

259 Mendoza College of Business
Notre Dame, IN Indiana 46556-0399
United States
574-631-1492 (Phone)

Quoc Nguyen (Contact Author)

DePaul University ( email )

1 East Jackson Blvd.
Chicago, IL 60604
United States

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