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Small Business Set-asides in Procurement Auctions: An Empirical Analysis

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  • Jun Nakabayashi

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 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.

Suggested Citation

  • 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.
  • Handle: RePEc:hst:ghsdps:gd09-126
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    File URL: http://gcoe.ier.hit-u.ac.jp/research/discussion/2008/pdf/gd09-126.pdf
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Takashi Akamatsu & Tomoya Mori & Yuki Takayama, 2015. "Agglomerations in a multi-region economy: Poly-centric versus mono-centric patterns," KIER Working Papers 929, Kyoto University, Institute of Economic Research.
    2. Hiroshi Ohashi, 2009. "Effects of Transparency in Procurement Practices on Government Expenditure: A Case Study of Municipal Public Works," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 34(3), pages 267-285, May.
    3. Rosa, Benjamin, 2016. "Resident Bid Preference, Affiliation, and Procurement Competition: Evidence from New Mexico," MPRA Paper 68759, University Library of Munich, Germany.
    4. 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.
    5. Gulnara Gafurova & Svetlana Fookina & Galina Notfullina, 2016. "Public Procurement as an Instrument for the Development of Small and Medium-Sized Business in Russia," Economy of region, Centre for Economic Security, Institute of Economics of Ural Branch of Russian Academy of Sciences, pages 1233-1243.
    6. Mayr, Dieter & Schmidt, Johannes & Schmid, Erwin, 2014. "The potentials of a reverse auction in allocating subsidies for cost-effective roof-top photovoltaic system deployment," Energy Policy, Elsevier, vol. 69(C), pages 555-565.
    7. Jehiel, Philippe & Lamy, Laurent, 2016. "On the benefits of set-asides," CEPR Discussion Papers 11564, C.E.P.R. Discussion Papers.
    8. Rosa, Benjamin, 2016. "Subcontracting Requirements and the Cost of Government Procurement," MPRA Paper 77392, University Library of Munich, Germany.
    9. repec:eee:jeborg:v:137:y:2017:i:c:p:113-131 is not listed on IDEAS
    10. Sundström, David, 2016. "A Comparison of Techniques to Evaluate Policies in Public Procurement," Umeå Economic Studies 928, Umeå University, Department of Economics, revised 17 Jun 2016.
    11. Ping-Yu Chen & Chia-Lin Chang & Chi-Chung Chen & Michael McAleer, 2012. "Modelling the Effects of Oil Prices on Global Fertilizer Prices and Volatility," Journal of Risk and Financial Management, MDPI, Open Access Journal, pages 1-37.

    More about this item

    Keywords

    procurement auctions; small business set-asides; structural estimation of auctions;

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - 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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