DP11662 Does federal contracting spur development? Federal contracts, income, output, and jobs in US cities

Author(s): Michiel Gerritse, Andrés Rodríguez-Pose
Publication Date: November 2016
Keyword(s): Economic Growth, federal contracting, government spending, jobs, urban development, wages
JEL(s): O23, R11, R38, R58
Programme Areas: International Trade and Regional Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=11662

Government contracts are frequently courted by firms and governments alike as a solution to generate more jobs, income, and economic growth. However, the development impact of government contracts remains controversial. This paper uses georeferenced data on United States (US) federal contracts, distinguishing between the location of the recipient and the location of performance, for the years 2005-2014 in order to assess the extent to which federal government contracting has contributed to job and wealth generation and economic growth in metropolitan areas of the US. The results of the analysis show that individuals living in cities with a higher share of contract spending per capita witnessed improvements in employment. Aggregate GDP per capita also rose in cities hosting the companies receiving the contracts. However, the effects - once reverse causality and spurious trends are controlled for using a fine-scale fixed effect strategy and instrumentation - are very small, raising reasonable questions about the viability of federal contracting as a vehicle for economic development.