This paper employs a new empirical approach for identifying the impact of government spending on the private sector. Our key innovation is to use changes in congressional committee chairmanship as a source of exogenous variation in state-level federal expenditures. In doing so, we show that fiscal spending shocks appear to significantly dampen corporate sector investment and employment activity. These corporate behaviors follow both Senate and House committee chair changes, are partially reversed when the congressman resigns, and are most pronounced among geographically concentrated firms. The effects are economically meaningful and the mechanism – entirely distinct from the more traditional interest rate and tax channels – suggests new considerations in assessing the impact of government spending on private sector economic activity.

The Erasmus Finance Seminar is jointly sponsored by ERIM and the Tinbergen Institute.