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Government Intervention and the Local Economy

Paper Session

Sunday, Jan. 5, 2025 8:00 AM - 10:00 AM (PST)

San Francisco Marriott Marquis, Yerba Buena Salon 3 & 4
Hosted By: American Finance Association
  • Mara Faccio, Purdue University

Segmented Multipliers: Evidence from Welfare Cuts

Manuel Adelino
,
Duke University
Jim Goldman
,
University of Warwick

Abstract

This paper uses a large welfare reform in the UK to show that reductions in transfers have local multipliers that are concentrated in lower-income households. While average “savings per job” from welfare cuts are commensurate with estimates of the “cost per job” from spending increases, the lower employment likelihood post-reform is entirely borne by low-income groups. A feedback loop between lower local demand and employment explains this result: We show that low-income households reduce consumption of goods and services of local firms after the reform. Consistent with this reduction, in areas with higher cuts per capita, employment at small firms in the non-tradable sector drops. Since low-income individuals work in sectors more exposed to local demand, this makes them more likely to bear the drop in employment, which further amplifies the lower demand. The loss in benefits and labor income is associated with an increase in unsecured debt for low-income groups.

Municipal and Economic Consequences of PFAS Contamination Discovery

Daisy Huang
,
Southwestern University of Finance and Economics
Amit Kumar
,
Singapore Management University

Abstract

Hazardous but previously unmonitored and unregulated, per- and polyfluoroalkyl substances (PFAS) were detected in 2016 in municipal drinking water systems across 33 US states during the first-ever PFAS testing. A paired-county difference-in-differences design that compares contaminated counties with neighboring, same-state uncontaminated counties shows that the contamination discovery raised municipal bond offering yields by 14 basis points. Municipal revenues, taxes, employment, and expenditures declined, while population out-migration increased. Consistent with the contamination requiring a higher compensating wage differential, wages in tradable industries rose, but job creation fell, and firm closures increased. Self-employment increased as well, indicating a heightened local unemployment risk.

The Golden Revolving Door

Ling Cen
,
Chinese University of Hong Kong
Lauren Cohen
,
Harvard University
Jing Wu
,
Chinese University of Hong Kong
Fan Zhang
,
Chinese University of Hong Kong

Abstract

Using both the onset of the US-China trade war in 2018 and the most recent Russia-Ukraine conflict and associated trade tensions, we show a counterintuitive pattern in global international trade. Namely, while the average firm trading with these nations significantly decreases their trade with these jurisdictions following sanctions, government-linked firms show a marked contrast. In particular, government-linked firms actually significantly increase their importing activity following the onset of formal sanctions. The increase is large, roughly 33% (t=4.01), following the shock, along with appearing tied to the sanction events. We find no increase for government-linked supplier firms generally to other countries (even countries in the same regions) at the same time, nor even of these same firms in these same regions at other times of no tension. In terms of mechanism, government supplier-linked firms are nearly twice as likely to receive tariff exemptions as equivalent firms doing trade in the region who are not government suppliers. More broadly, these effects are increasing in level of government connection. For instance, firms that are geographically closer to the agencies to which they supply increase their imports more acutely. Using micro-level data, we find that government supplying firms that recruit more employees with past government work experience also increase their importing activity more – particularly when the past employee worked in a government-contracting role. Lastly, we find evidence that this results in sizable accrued benefits in terms of firm-level profitability, market share gains, and outsized stock returns.

Discussant(s)
Maria-teresa Marchica
,
Manchester Business School
Jess Cornaggia
,
Pennsylvania State University
Denis Sosyura
,
Arizona State University
JEL Classifications
  • G3 - Corporate Finance and Governance