Weaned off public money: The effect of discontinued reception of public cash on firm outcomes

Abstract

Given the large footprint of the public sector in modern capitalist economies, many businesses are recipients of public money. But how are recipient firms impacted when they are weaned off public money? Drawing on unique data from Slovenia, we assemble a firm-level panel linking comprehensive records on public-sector cash transactions to businesses with detailed annual information on more than 72,000 firms observed between 2015 and 2019. To address endogeneity, we combine matching with difference-in-differences estimation. Weaning-off on average fundamentally disrupts a firm's production and organization, causing a marked decline in output, total assets, and input use, as well as a decrease in productivity and export proclivity. Several effects of weaning-off are contingent on firm age. Younger firms undergo comparatively stronger effects on production operations, but, interestingly, only older firms experience negative effects on productivity and liquidity. Estimated aggregate value-added losses incurred by treated firms fall short of the total amount of public money disbursed to those firms. Thus, from a normative standpoint, diminished transactional involvement of the public sector with firms could potentially generate net social gains. Our analysis offers a new perspective on the repercussions of public sector's involvement in the economy.