Government Deleveraging and the Reverse Crowding-In Effect: Evidence from Subnational Debt and Government Contractors

We document a novel trade-credit channel through which government deleveraging affects the private economy. Our empirical analysis exploits China’s 2017 deleveraging campaign that reduced local governments’ net financing capacity and a purpose-built data set of listed firms matched with government procurement contracts. Compared with noncontractors, private contractors experience larger increases in accounts receivable and deterioration in financial conditions, leading to fewer investments, worse operating performance, and higher probabilities of ownership changes. The effects are muted among state-owned enterprises, which demonstrate lower productivity. Our findings thus reveal a reverse crowding-in effect whereby government deleveraging adversely affects private firms and reduces allocative efficiency. This paper was accepted by Lin William Cong, finance. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2024.05679 .