Government As Customer of Last Resort: The Stabilizing Effects of Government Purchases on Firms

63 Pages Posted: 8 Feb 2019

Date Written: December 11, 2018

Abstract

I document a beneficial effect of the government’s participation in product markets. Exploiting the 2008-09 financial crisis as a natural experiment, I show that federal procurement contracts insulate government contractors’ performance from the crisis. By 2009, government contractors had 19% higher market capitalization, 21% higher capital expenditures, and received 24% more bank credit than otherwise similar firms. This stabilizing effect, in turn, spills over onto neighboring firms. An average amount of government purchases reduces local employment losses by 35% in retail industries and by 48% in industries supplying government contractors. The spillovers are particularly strong in high economic slack areas.

Keywords: Firm risk, Crisis, Government spending, Employment

JEL Classification: E24, G32, G38, H32, H57

Suggested Citation

Goldman, Jim, Government As Customer of Last Resort: The Stabilizing Effects of Government Purchases on Firms (December 11, 2018). Available at SSRN: https://ssrn.com/abstract=3323082 or http://dx.doi.org/10.2139/ssrn.3323082

Jim Goldman (Contact Author)

University of Toronto ( email )

Department of Economics
Toronto, Ontario M5S 3G7
Canada

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