The Effect of Public Spending on Private Investment: Evidence from Census-Shock

Abstract

In this paper, we examine the causal impact of public sector spending on corporate investment. Based on the fact that federal funds allocated to local governments depend largely on local population levels, we use population count revisions in census years as exogenous shocks to the cross-sectional allocation of federal funds. We find that exogenous increases in federal spending reduce firms’ capital investment, R&D spending, employment growth, and sales growth. The effect is stronger for firms in regions with higher employment and firms that are more labor-intensive, smaller-sized, and geographically concentrated. An exogenous increase in government hiring also reduces corporate hiring.