Can Government Demand Stimulate Private Investment?

While many researchers have looked at the effect of government spending on private consumption, few studies have focused on the impact of state spending on private investment. According to economic theory, companies – absent funding constraints – should invest until the marginal benefit of their investment equals their cost of capital. However, many firms’ imperfect access to capital limits their investing, thereby causing them to forgo potentially profitable activity. To understand the influence of government spending on the economy, it is critical to assess whether that spending helps companies overcome...