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The Effect of Public Investment on Private Investment: Theory and Evidence on the Local Market Competition Channel

Author

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  • Sophia Chen

    (International Monetary Fund)

  • Yu Shi

    (International Monetary Fund)

Abstract
We develop a model of imperfect competition with variable markups to analyze the role of market competition in the transmission of targeted fiscal stimulus. We find that the more competitive the market is, the more sectoral output responds to fiscal stimulus in the targeted sector. The more competitive the market is, the less sectoral prices, sector-specific factor prices, and markup respond. We offer new empirical evidence consistent with these theoretical predictions in the context of the large fiscal stimulus in China in 2009-2010. Overall, our results support the view that market competition facilitates the transmission of fiscal stimulus.

Suggested Citation

  • Sophia Chen & Yu Shi, 2019. "The Effect of Public Investment on Private Investment: Theory and Evidence on the Local Market Competition Channel," 2019 Meeting Papers 708, Society for Economic Dynamics.
    • Handle: RePEc:red:sed019:708
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