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The Effect of Public Spending on Private Investment

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  • Taehyun Kim
  • Quoc H Nguyen

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.

Suggested Citation

  • Taehyun Kim & Quoc H Nguyen, 2020. "The Effect of Public Spending on Private Investment," Review of Finance, European Finance Association, vol. 24(2), pages 415-451.
    • Handle: RePEc:oup:revfin:v:24:y:2020:i:2:p:415-451.
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    File URL: http://hdl.handle.net/10.1093/rof/rfz003
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    References listed on IDEAS

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    6. Ramey, Valerie A. & Shapiro, Matthew D., 1998. "Costly capital reallocation and the effects of government spending," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 48(1), pages 145-194, June.
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    Cited by:

    1. Yun Yang & Feng Hao & Xingchen Meng, 2024. "How does the national e-commerce demonstration city pilot policy boost economic growth? Evidence from China," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 51(4), pages 929-975, November.
    2. Zhang, Zuomin & Dai, Ling, 2023. "The bank loan distribution effect of government spending expansion: Evidence from China," International Review of Financial Analysis, Elsevier, vol. 89(C).
    3. Asif Islam & Gregmar I. Galinato & Wentao Zhang, 2021. "Can government spending boost firm sales?," Kyklos, Wiley Blackwell, vol. 74(4), pages 488-511, November.
    4. Van Bon Nguyen, 2023. "The Relationship between Public Expenditure and Private Investment in Developed and Developing Economies: Policy Implications Based on the Difference," Hacienda Pública Española / Review of Public Economics, IEF, vol. 244(1), pages 37-55, March.
    5. Gabriel, Ricardo Duque, 2024. "The Credit Channel of Public Procurement," Journal of Monetary Economics, Elsevier, vol. 147(S).
    6. Willem Vanlaer & Mattia Picarelli & Wim Marneffe, 2021. "Debt and Private Investment: Does the EU Suffer from a Debt Overhang?," Open Economies Review, Springer, vol. 32(4), pages 789-820, September.

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    More about this item

    Keywords

    Firm investment; Fiscal policy; Crowding out; Labor;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • J01 - Labor and Demographic Economics - - General - - - Labor Economics: General

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