Government Contracts and Labor Investment Efficiency

Abstract

This paper investigates the impact of government contracts on labor investment efficiency by examining federal contracts awarded to U.S. public firms from 2001 to 2019. Firms with government contracts exhibit improved labor investment efficiency, seen through decreased abnormal labor hirings, addressing both under- and over-investment issues. The positive relationship between the political sensitivity of contracts and labor investment efficiency is nuanced; stronger contractor bargaining power moderates this effect. Non-labor investment efficiency, however, remains unaffected by government contracts. Rigorous tests, including propensity score matching and Two-Stage Least Squares estimation, confirm these findings' robustness. This research contributes to corporate governance and resource allocation literature by revealing the role of government contracts in enhancing labor investment efficiency, especially in politically sensitive contexts.