Political Connections, Allocation of Stimulus Spending, and the Jobs Multiplier
Joonkyu Choi, Veronika Penciakova, and Felipe Saffie
Working Paper 2021-13
Abstract: Using American Recovery and Reinvestment Act (ARRA) data, we show that firms lever their political connections to win stimulus grants and that public expenditure channeled through politically connected firms hinders job creation. We build a unique database that links information on campaign contributions, state legislative elections, firm characteristics, and ARRA grant allocation. Using exogenous variation in political connections based on ex-post close elections held before ARRA, we causally show that politically connected firms are 38 percent more likely to secure a grant. Based on an instrumental variable approach, we also establish that a one standard deviation increase in the share of politically connected ARRA spending lowers the number of jobs created per $1 million spent by 7.1 jobs. Therefore, the impact of fiscal stimulus is not only determined by how much is spent, but also by how the expenditure is allocated across recipients.
JEL classification: D22, D72, E62, H57, P16
Key words: campaign finance, state grants, public expenditure allocation, American Recovery and Reinvestment Act
The authors thank Ufuk Akcigit, Salome Baslandze, Tarek Hassan, Thomas Hegland, Ethan Kaplan, Daniel Wilson, as well as seminar participants at the University of Maryland, the spring 2017 Midwest Macro Meetings, the 2017 North American Meeting of the Econometric Society, the 2017 European Meeting of the Econometric Society, Workshop on Innovation and Entrepreneurship (Tbilsi), Pontificia Universidad Catolica de Chile, the Federal Reserve Board, Georgetown University, the Fall 2019 I-85 Macroeconomics Workshop, the Federal Reserve Bank of Atlanta, Auburn University, and the Bureau of Labor Statistics. The views expressed here are those of the authors and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.
Please address questions regarding content to Joonkyu Choi, Federal Reserve Board of Governors; Veronika Penciakova, Federal Reserve Bank of Atlanta; or Felipe Saffie, University of Virginia, Darden School of Business.
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