Working Paper: CEPR ID: DP17023
Authors: Julian Di Giovanni; Manuel Garcasantana; Enrique Moral-Benito; Josep Pijoan-Mas
Abstract: This paper provides a framework to study how different allocation systems of public procurement contracts affect firm dynamics and long-run macroeconomic outcomes. It builds a novel panel dataset for Spain that merges public procurement data, credit register loan data, and quasi-census firm-level data. The paper provides evidence consistent with the hypothesis that procurement contracts act as collateral for firms and help them grow out of their financial constraints. The paper then builds a model of firm dynamics with asset- and earnings-based borrowing constraints and a government that buys goods and services from private sector firms, and uses it to quantify the long-run macroeconomic consequences of alternative procurement allocation systems. The findings show that policies that promote the participation of small firms have sizeable macroeconomic effects, but the net impact on aggregate output is ambiguous. While these policies help small firms grow and overcome financial constraints, which increases output in the long run, these policies also increase the cost of government purchases and reduce saving incentives for large firms, decreasing the effective provision of public goods and output in the private sector, respectively. The relative importance of these forces depends on how the policy is implemented and the type and strength of financial frictions.
Keywords: government procurement; financial frictions; capital accumulation; aggregate productivity
JEL Codes: E22; E23; E62; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| procurement contracts (H57) | firm growth (L26) |
| procurement contracts (H57) | financial constraints (H60) |
| firm growth (L26) | GDP (E20) |
| procurement policies (H57) | government purchase costs (H57) |
| procurement policies (H57) | public goods provision (H41) |
| procurement contracts (H57) | sales to private sector (L33) |
| sales to private sector (L33) | sales increase in long run (L19) |
| financial constraints (H60) | response to procurement opportunities (H57) |
| financial constraints (H60) | crowding-out effects (E62) |