Government Spending, Entry, and the Consumption Crowding‐In Puzzle

30 Pages Posted: 28 Aug 2017

See all articles by Vivien Lewis

Vivien Lewis

Research Centre; KU Leuven

Roland Winkler

Dortmund University, Faculty of Business, Economics, and Social Sciences,

Date Written: August 2017

Abstract

This article documents empirically that net firm entry robustly rises after a U.S. government spending expansion. We use this new finding to test the empirical validity of various model features that have been proposed to generate consumption crowding‐in after positive expenditure shocks. Endogenous‐entry models typically fail to generate the observed joint increase in consumption and entry. Model features that dampen the wealth effect, such as rule‐of‐thumb households or complementarity between labor and consumption in preferences, tend to reduce entry. We show that utility‐ or productivity‐enhancing public spending can reconcile the model with our documented fact and performs well empirically.

Suggested Citation

Lewis, Vivien and Winkler, Roland, Government Spending, Entry, and the Consumption Crowding‐In Puzzle (August 2017). International Economic Review, Vol. 58, Issue 3, pp. 943-972, 2017. Available at SSRN: https://ssrn.com/abstract=3026830 or http://dx.doi.org/10.1111/iere.12241

Vivien Lewis (Contact Author)

Research Centre ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

KU Leuven ( email )

Oude Markt 13
Leuven, 3000
Belgium

Roland Winkler

Dortmund University, Faculty of Business, Economics, and Social Sciences, ( email )

United States

Register to save articles to
your library

Register

Paper statistics

Downloads
0
Abstract Views
73
PlumX Metrics