That is the question in a new paper forthcoming in the Journal of Urban Economics by Andres Rodriguez-Pose (London School of Economics) and Michiel Gerritse (University of Groningen), and the full title is “Does Federal Contracting Spur Development? Federal Contracts, Income, Output, and Jobs in US Cities.” Here is the abstract:
Firms and governments alike frequently court federal government contracts to generate more jobs and trigger economic growth. However, the employment and output impact of government contracts remains controversial. We use georeferenced data on United States (US) federal contracts, distinguishing between the location of the recipient and the location of the activity, for the years 2005-2014 in order to assess the employment and output impacts of federal contracting in metropolitan areas of the US. We resort to a shift-share instrument and precise location-specific fixed effects to estimate the causal impact of spending. Cities that receive more contract expenditure witness an expansion in output – with contracts generating $1.4 per dollar spent – but experience only modest increases in employment. The impact is also constrained geographically and short-lived. The results suggest that, on average, the effects of federal contracting on local economies are modest, meaning that attracting federal contracts may not be an effective urban development strategy.
For those reading carefully at home, the abstract is describing a Bartik instrument, and yes, it considers advice from Goldsmith-Pinkham et al. (2018) and shows that it results in a weak instrument problem that they are able to improve upon through a principal component analysis. Check out Appendix B for more.
To think about this question more theoretically, the not-famous 1956 Charles Tiebout JPE paper is highly readable, and you can see it attempt to establish a theoretically sound bridge between city planners and economic researchers.