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

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.