This article documents empirically that net firm entry robustly rises after a U.S. government spending expansion. We use this new finding to test the empirical validity of various model features that have been proposed to generate consumption crowding-in after positive expenditure shocks. Endogenous-entry models typically fail to generate the observed joint increase in consumption and entry. Model features that dampen the wealth effect, such as rule-of-thumb households or complementarity between labor and consumption in preferences, tend to reduce entry. We show that utility- or productivity-enhancing public spending can reconcile the model with our documented fact and performs well empirically.
