Working Paper: NBER ID: w15839
Authors: Lauren Cohen; Joshua D. Coval; Christopher Malloy
Abstract: This paper employs a new empirical approach for identifying the impact of government spending on the private sector. Our key innovation is to use changes in congressional committee chairmanship as a source of exogenous variation in state-level federal expenditures. In doing so, we show that fiscal spending shocks appear to significantly dampen corporate sector investment and employment activity. These corporate reactions follow both Senate and House committee chair changes, are present among large and small firms and within large and small states, are partially reversed when the congressman resigns, and are most pronounced among geographically-concentrated firms. The effects are economically meaningful and the mechanism - entirely distinct from the more traditional interest rate and tax channels - suggests new considerations in assessing the impact of government spending on private sector economic activity.
Keywords: government spending; corporate investment; congressional committee chairmanship
JEL Codes: E13; E62; G31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Congressional committee chairmanship (D72) | Federal funds to state (H77) |
| Federal funds to state (H77) | Corporate retrenchment (G34) |
| Federal funds to state (H77) | Reduction in R&D spending (O32) |
| Federal funds to state (H77) | Increase in payouts to shareholders (G35) |
| Earmark spending (H61) | Corporate retrenchment (G34) |
| Total state-level government transfers (H79) | Corporate retrenchment (G34) |
| Increased public spending (H59) | Reduced private sector investment (H54) |
| Increased public spending (H59) | Reduced employment growth (J23) |