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.

In the USA, state-level exemptions determine the amount of property that individuals can protect from creditor liquidation during the debt settlement process. We exploit within-metropolitan statistical area variation in personal bankruptcy exemptions created by state borders and a stacked regression approach to identify the spillover effects of these laws on business credit extended to small firms. Subsequent to exemption increases, we find a reduction of 1–2 percent in originations of business credit. The effect is strongest for the smallest firms, which are more financially constrained. We provide household-level evidence that both business debt and personal debt decline for borrowers whose home equity becomes covered by the exemption, suggesting an overall decrease in credit availability for small businesses. As a result, increases in exemptions lead to fewer small establishments and lower employment, especially in industries dependent on external finance, suggesting that negative real economic effects occur via a credit market channel.