Government contracts and labor investment efficiency

Abstract

This study investigates the impact of government contracts on labor investment efficiency in U.S. public firms between 2001 and 2019. We find that firms awarded with government contracts exhibit improved labor investment efficiency, characterized by reduced abnormal labor hiring, evident in both overinvestment and underinvestment issues. Government contracts are particularly beneficial for financially constrained firms, enhancing their ability to manage labor resources effectively. Additionally, the regulatory framework associated with government contracts reduces labor overinvestment, although it may exacerbate underinvestment where labor rights are weak. The political sensitivity of contractors also improves labor investment efficiency. However, this effect diminishes with contractors' increased bargaining power. Contrary to expectations, political connections and lobbying activities do not significantly alter the impact of government contracts on labor investment efficiency. This study highlights the nuanced role of government contracts in shaping labor investment practices and unravels the underlying mechanisms driving these outcomes, thus contributing to the literature on government contracts, corporate finance, and labor rights.