Small Business Set-asides in Procurement Auctions: An Empirical Analysis
AbstractAs part of public procurement, many governments adopt small business programs to pro- vide contract opportunities for businesses often with preferences for firms operated by mem- bers 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 Economics, Graduate School of Humanities and Social Sciences, University of Tsukuba in its series Tsukuba Economics Working Papers with number 2009-005.
Date of creation: Mar 2009
Date of revision: Nov 2009
Other versions of this item:
- Jun Nakabayashi, 2010. "Small Business Set-asides in Procurement Auctions: An Empirical Analysis," Global COE Hi-Stat Discussion Paper Series gd09-126, Institute of Economic Research, Hitotsubashi University.
- 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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