January 2021

Political Connections, Allocation of Stimulus Spending, and the Jobs Multiplier

Joonkyu Choi, Veronika Penciakova, Felipe Saffie

Abstract:

Using American Recovery and Reinvestment Act (ARRA) data, we show that firms lever their political connections to win stimulus grants and public expenditure channeled through politically connected firms hinders job creation. We build a unique database that links campaign contributions and state legislative election outcomes to 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 64 percent more likely to secure a grant. Based on an instrumental variable approach, we also establish that state-level employment creation associated with grants channeled through politically connected firms is nil. 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.

DOI: https://doi.org/10.17016/FEDS.2021.005

PDF: Full Paper

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Last Update: January 29, 2021