Cross-Policy Risk Pricing 
Major government policy tools rarely operate in isolation, yet research analysis typically studies each policy as an independent intervention. When one policy increases firms’ exposure to risk other fiscal instruments may offset that risk through spending, transfers, or targeted support. This paper studies this question in the context of the 2018–2019 U.S. tariff episode, when tariff increases raised input costs and uncertainty while federal procurement remained a large and ongoing fiscal channel directed to U.S. firms. One hypothesis is that procurement cushioned tariff exposure through government demand; on the other hand, procurement may reflect other budgetary or political priorities. Using transaction-level procurement data linked with firm-specific tariff exposure, the authors test whether procurement partially cushions the financial and real consequences of tariffs, and whether cross-policy interactions are priced into firms’ cost of equity capital.
Key Findings
- Firms with greater tariff exposure earn higher subsequent risk premia (approximately 1.25 percentage points per standard deviation), but this increase is substantially smaller for firms receiving more procurement, which attenuates about 68 percent of the tariff-related premium.
- The procurement response is relatively more favorable for firms with stronger lobbying ties to Republican-sponsored legislation and firms that ultimately receive tariff exemptions. These same characteristics are associated with lower tariff-related risk premia, suggesting investors recognize which firms are more likely to receive favorable treatment.
- Tariff shocks reduce subsequent earnings growth most strongly at three to four quarters, while greater procurement offsets 30 to 33 percent of these negative effects, demonstrating that fiscal insurance operates beyond financial markets to affect realized outcomes.
- These patterns reveal a cross-policy mechanism—fiscal insurance—through which one government instrument partially offsets the financial and real consequences of another.
Implications
The findings demonstrate that policy transmission operates through cross-policy channels with important implications for understanding how governments influence markets and real economic activity. The impact of a given policy on firms and markets depends not only on its direct design but also on how concurrent fiscal instruments are allocated across firms. This perspective implies that estimates of policy risk or policy uncertainty are incomplete when other stabilizing tools are active, and that the same policy shock can produce different financial and real consequences across firms depending on their access to fiscal offsetting.
Abstract
We show that interactions across government policies affect firms’ cost of equity capital. Exploiting the 2018–2019 U.S. tariff shocks and concurrent federal procurement spending, we find that firms facing higher tariff exposure earn higher subsequent risk premia, but this effect is substantially attenuated for firms receiving greater procurement. A one-standard-deviation increase in procurement attenuates about two-thirds of the tariff-related risk premium. Procurement is relatively more favorable for politically connected and economically vulnerable firms. Larger procurement inflows also attenuate tariff-induced declines in subsequent earnings. Together, these findings reveal a form of fiscal insurance in which government procurement partially offsets the financing and real consequences of tariff exposure.