Buy Big or Buy Small?
This paper provides a framework to study how different allocation systems of public procurement contracts affect firm dynamics and long-run macroeconomic outcomes. It builds a novel panel dataset for Spain that merges public procurement data, credit register loan data, and quasi-census firm-level data. The paper provides evidence consistent with the hypothesis that procurement contracts act as collateral for firms and help them grow out of their financial constraints. The paper then builds a model of firm dynamics with asset- and earnings-based borrowing constraints and a government that buys goods and services from private sector firms, and uses it to quantify the long-run macroeconomic consequences of alternative procurement allocation systems. The findings show that policies which promote the participation of small firms have sizeable macroeconomic effects, but the net impact on aggregate output is ambiguous. While these policies help small firms grow and overcome financial constraints, which increases output in the long run, these policies also increase the cost of government purchases and reduce saving incentives for large firms, decreasing the effective provision of public goods and output in the private sector, respectively. The relative importance of these forces depends on how the policy is implemented and the type and strength of financial frictions.
| Main Authors: | , , , , |
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| Format: | Working Paper biblioteca |
| Language: | English English |
| Published: |
World Bank, Washington, DC
2023-07-25
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| Subjects: | GOVERNMENT PROCUREMENT, FINANCIAL FRICTION, CAPITAL ACCUMULATION, AGGREGATE PRODUCTIVITY, PROCUREMENT RULES, FIRM DYNAMICS, SMALL FIRM GROWTH CONSTRAINT, |
| Online Access: | http://documents.worldbank.org/curated/en/099734007242321169/IDU0fe37cff9055fd040960886005f45bc3d3234 https://openknowledge.worldbank.org/handle/10986/40077 |
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| Summary: | This paper provides a framework to
study how different allocation systems of public procurement
contracts affect firm dynamics and long-run macroeconomic
outcomes. It builds a novel panel dataset for Spain that
merges public procurement data, credit register loan data,
and quasi-census firm-level data. The paper provides
evidence consistent with the hypothesis that procurement
contracts act as collateral for firms and help them grow out
of their financial constraints. The paper then builds a
model of firm dynamics with asset- and earnings-based
borrowing constraints and a government that buys goods and
services from private sector firms, and uses it to quantify
the long-run macroeconomic consequences of alternative
procurement allocation systems. The findings show that
policies which promote the participation of small firms have
sizeable macroeconomic effects, but the net impact on
aggregate output is ambiguous. While these policies help
small firms grow and overcome financial constraints, which
increases output in the long run, these policies also
increase the cost of government purchases and reduce saving
incentives for large firms, decreasing the effective
provision of public goods and output in the private sector,
respectively. The relative importance of these forces
depends on how the policy is implemented and the type and
strength of financial frictions. |
|---|