Can Government Demand Stimulate Private Investment? Evidence from U.S. Federal Procurement

43 Pages Posted: 8 Mar 2019

See all articles by Shafik Hebous

Shafik Hebous

International Monetary Fund

Tom Zimmermann

University of Cologne

Multiple version iconThere are 2 versions of this paper

Date Written: 2019

Abstract

We study the effects of federal purchases on firm investment using a novel panel dataset that combines federal procurement contracts in the United States with key financial firm-level information. Using panel fixed-effect models, propensity score matching, and inverse probability weighting estimation techniques, we find that 1 dollar of federal spending increases firms’ capital investment by 10 to 13 cents. In line with the financial accelerator model, our findings indicate that the effect of government purchases works through easing firms’ access to external borrowing. In particular, the effect is stronger for firms that face financing constraints and it is insignificant for unconstrained firms. Moreover, an 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. Overall, our findings lend support to recent evidence on local multipliers in that increases in regional outputs should ultimately be reflected in firm balance sheets (demand for capital).

Keywords: investment, federal procurement, financing constraints, spending, multipliers

JEL Classification: E620, H320, E690

Suggested Citation

Hebous, Shafik and Zimmermann, Tom, Can Government Demand Stimulate Private Investment? Evidence from U.S. Federal Procurement (2019). CESifo Working Paper No. 7534. Available at SSRN: https://ssrn.com/abstract=3348723

Shafik Hebous (Contact Author)

International Monetary Fund ( email )

Washington, DC
United States

Tom Zimmermann

University of Cologne ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany

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