Government Procurement and the Growth of Small Firms

I estimate the causal effects of demand shocks, stemming from government procurement, on the growth of small firms in Ecuador. I assemble a unique dataset using several new administrative sources and, as identification strategy, exploit a governmental procurement process that allocates public contracts through a randomized contest. This paper provides three main contributions to the literature. First, it shows the positive and significant effect of demand shocks on firm growth. On average, an increase in demand of 10% will increase wage expenses by 4% and fixed assets by 5% during the year of the shock. Second, it finds no evidence of spill-over effects from demand shocks on sales to the public or private sector. Finally, as in other studies, it is shown that demand positively impacts firm growth but, contrary to other findings, this effect is temporary and only observed during the year of the shock.