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

Author/Editor: Shafik Hebous ; Tom Zimmermann
Publication Date: March 10, 2016
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate
Summary: We study the effects of federal purchases on firms’ investment using a novel panel dataset that combines federal procurement contracts in the United States with key financial firm-level information. We find that 1 dollar of federal spending increases firms’ capital investment by 7 to 11 cents. The average effect masks heterogeneity: Effects are stronger for firms that face financing constraints and they are close to 0 for unconstrained firms. In line with the financial accelerator model, our findings indicate that the effect of government purchases works through easing firms’ access to external borrowing. Furthermore, 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.
Series: Working Paper No. 16/60
Subject(s): Public procurement | United States | Demand | Government expenditures | Private investments | Business enterprises | External borrowing | Econometric models

Publication Date: March 10, 2016
ISBN/ISSN: 9781513578729/1018-5941 Format: Paper
Stock No: WPIEA2016060 Pages: 33
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