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Small business set-asides in procurement auctions: An empirical analysis

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  • Nakabayashi, Jun

Abstract

As part of public procurement, many governments adopt small business programs to provide contract opportunities for businesses often with preferences for firms operated by members of groups designated as disadvantaged. The redistribution arising from such programs, however, can introduce significant additional costs to government procurement budgets. In this paper, the extent to which small business set-asides increased government procurement costs is examined. The estimates employ data on Japanese public construction projects, where approximately half of the procurement budget is set aside for small and medium enterprises (SMEs). Applying a positive relationship between profitability and firm size obtained by the nonparametric estimation of an asymmetric first-price auction model with affiliated private values, a counterfactual analysis is undertaken to demonstrate that approximately 40percent of SMEs would exit the procurement market if set-asides were removed. Surprisingly, the resulting lack of competition would increase government procurement costs more than it would offset the production cost inefficiency.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 100 (2013)
Issue (Month): C ()
Pages: 28-44

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Handle: RePEc:eee:pubeco:v:100:y:2013:i:c:p:28-44

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Web page: http://www.elsevier.com/locate/inca/505578

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Keywords: Procurement auctions; Small business set-asides; Nonparametric estimation;

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Cited by:
  1. Klênio de Souza Barbosa & Pierre C. Boyer, 2011. "Competition for Local Public Services with Learning-by-doing and Transferability," Working Papers 06-2011, Universidade de São Paulo, Faculdade de Economia, Administração e Contabilidade de Ribeirão Preto.
  2. Makoto HANAZONO & Jun NAKABAYASHI & Masanori TSURUOKA, 2013. "Procurement Auctions with General Price-Quality Evaluation," KIER Working Papers 845, Kyoto University, Institute of Economic Research.
  3. Hiroshi Ohashi, 2009. "Effects of Transparency in Procurement Practices on Government Expenditure: A Case Study of Municipal Public Works," Review of Industrial Organization, Springer, vol. 34(3), pages 267-285, May.

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