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GOVERNMENT SPENDING, ENTRY, AND THE CONSUMPTION CROWDING‐IN PUZZLE
Author(s) -
Lewis Vivien,
Winkler Roland
Publication year - 2017
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/iere.12241
Subject(s) - economics , government spending , complementarity (molecular biology) , consumption (sociology) , crowding out , consumer spending , productivity , rule of thumb , government (linguistics) , microeconomics , monetary economics , macroeconomics , computer science , welfare , recession , social science , linguistics , philosophy , genetics , algorithm , sociology , market economy , biology
This article documents empirically that net firm entry robustly rises after a U.S. government spending expansion. We use this new finding to test the empirical validity of various model features that have been proposed to generate consumption crowding‐in after positive expenditure shocks. Endogenous‐entry models typically fail to generate the observed joint increase in consumption and entry. Model features that dampen the wealth effect, such as rule‐of‐thumb households or complementarity between labor and consumption in preferences, tend to reduce entry. We show that utility‐ or productivity‐enhancing public spending can reconcile the model with our documented fact and performs well empirically.