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Do Public Sector Contracts And Policy Towards Small Firms Matter?: Evidence From Women Business Enterprises

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  • Cadogan, Godfrey

Abstract

This paper provides an empirical investigation of the agency relationship between the public sector and small firms targeted for assistance by examining micro and macro data for a cross section of eligible women business enterprises (WBEs). Using hedonic sales and employment indices we find that 2% of firm sales is lost to negative gender externality. We show that under asymmetric information public sector transfers neither compensate for this loss of sales nor do they increase employment. When we impose transfer restrictions under perfect information, sales is unaffected but firms respond by increasing the amount of part time employees hired and do not increase full time employment. Moreover, we show that WBE presence at the state level depend on prime-contractor-sub-contractor relationships and that if long term contracts are offered then business risks are reduced and firms increase employment levels because of securitized sales. Further, formation of new WBEs are directly proportional to the amount of new small business loans provided in the economy after controlling for size and population effects. The evidence suggests that after President Richard Nixon signed Executive Order 11625 the velocity of new WBE formation is approximately 39% of the difference between policy targets and actual realization. We introduce an entrepreneurial reaction function which shows that firms react to private and public sector funding incentives but not to the level of education attainment and overall business formation in the economy. We find that agency problems provide incentives for firms to engage in strategic misrepresentation. Thus, the incidence of adverse selection in current transfer programs are as high as 60% in some instances; imposes an asymmetric residual loss on the public sector, and contrary to the goals of benevolent policy, transfers are skewed in favor of less needy firms.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 26595.

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Date of creation: May 1994
Date of revision: 14 Sep 2010
Handle: RePEc:pra:mprapa:26595

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Keywords: negative externalities; compensatory financial contracts; hedonic indices; business risk; entrepreneur reaction function;

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References

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  1. Brenda G. Cox & Gregory E. Elliehausen & John D. Wolken, 1989. "The national survey of small business finances: description and preliminary evaluation," Finance and Economics Discussion Series 93, Board of Governors of the Federal Reserve System (U.S.).
  2. Timothy Bates, 1995. "Small Businesses Do Appear To Benefit From State/Local Government Economic Development Assistance," Working Papers 95-2, Center for Economic Studies, U.S. Census Bureau.
  3. Petersen, Mitchell A & Rajan, Raghuram G, 1994. " The Benefits of Lending Relationships: Evidence from Small Business Data," Journal of Finance, American Finance Association, vol. 49(1), pages 3-37, March.
  4. Holtz-Eakin, D. & Joulfaian, D. & Rosen, H.S., 1992. "Entrepreneurial Decisions and Liquidity Constraints," Papers 129, Princeton, Department of Economics - Financial Research Center.
  5. Bates, Timothy, 1990. "Entrepreneur Human Capital Inputs and Small Business Longevity," The Review of Economics and Statistics, MIT Press, vol. 72(4), pages 551-59, November.
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  7. J. A. Hausman, 1976. "Specification Tests in Econometrics," Working papers 185, Massachusetts Institute of Technology (MIT), Department of Economics.
  8. Mark Gertler & Simon Gilchrist, 1993. "Monetary policy, business cycles and the behavior of small manufacturing firms," Finance and Economics Discussion Series 93-4, Board of Governors of the Federal Reserve System (U.S.).
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  12. Bruce D. Meyer, 1990. "Why Are There So Few Black Entrepreneurs?," NBER Working Papers 3537, National Bureau of Economic Research, Inc.
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  14. Holtz-Eakin, Douglas & Joulfaian, David & Rosen, Harvey S, 1994. "Sticking It Out: Entrepreneurial Survival and Liquidity Constraints," Journal of Political Economy, University of Chicago Press, vol. 102(1), pages 53-75, February.
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  16. Douglas Holtz-Eakin & David Joulfaian & Harvey Rosen, 1992. "Entrepreneurial Decisions and Liquidity Constraints," Working Papers 679, Princeton University, Department of Economics, Industrial Relations Section..
  17. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
  18. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-70, May.
  19. Titman, Sheridan & Wessels, Roberto, 1988. " The Determinants of Capital Structure Choice," Journal of Finance, American Finance Association, vol. 43(1), pages 1-19, March.
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