Small Business Set-asides in Procurement Auctions: An Empirical Analysis
AbstractAs 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 added costs to government procurement budgets. In this paper, the extent to which small business set-asides increase 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 non-parametric estimation of asymmetric first-price auctions with affiliated private values, a counterfactual simulation is undertaken to demonstrate that approximately 40 percent of SMEs would exit the procurement market if set-asides were to be 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 InfoPaper provided by Institute of Economic Research, Hitotsubashi University in its series Global COE Hi-Stat Discussion Paper Series with number gd09-126.
Date of creation: Mar 2010
Date of revision:
procurement auctions; small business set-asides; structural estimation of auctions;
Other versions of this item:
- Nakabayashi, Jun, 2013. "Small business set-asides in procurement auctions: An empirical analysis," Journal of Public Economics, Elsevier, vol. 100(C), pages 28-44.
- Jun Nakabayashi, 2009. "Small Business Set-asides in Procurement Auctions: An Empirical Analysis," Tsukuba Economics Working Papers 2009-005, Economics, Graduate School of Humanities and Social Sciences, University of Tsukuba, revised Nov 2009.
- D44 - Microeconomics - - Market Structure and Pricing - - - Auctions
- H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
- H57 - Public Economics - - National Government Expenditures and Related Policies - - - Procurement
- L74 - Industrial Organization - - Industry Studies: Primary Products and Construction - - - Construction
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