Small business set-asides in procurement auctions: An empirical analysis

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.

Reconciling Conflicting Policy Objectives in Public Contracting: The Enabling Role of Capabilities

“…On the government side, some argue that the increased number of bidders encouraged by preference programs to favour SMEs can stimulate competition, enable cost savings (McAfee and McMillan, ; Nakabayashi, ) and avoid differences between restricted bids and unrestricted solicitations in public contracting (Denes, ). Favoured companies may also offer cheaper goods and services when they are able to address specific customer needs not covered by non‐favoured rivals (Flambard and Perrigne, ; Nooteboom, ).…”

Adoption of reverse auctions in public e-procurement: The case of Portugal

“…The available literature suggests a focus upon four major dimensions regarding eRA analysis: (1) its characteristics [12,13], (2) its appropriateness [14,15,16], (3) the adoption of eRA and integration into organizations' business processes [17,18,19,20] and (4) the impacts/risks of the eRA [21,22,23,24]. The literature is also organized in accordance with the sector in which eRA are used: both the public sector [21,25,26] and private sector, the first deserving a bigger highlight in our study.…”

Public Procurement Regulation and Road Quality

“…The existing literature on public procurement regulation has studied the determinants of public sector costs or linked the public procurement process to infrastructure quality outcomes. A strand of the literature has investigated the effect of discriminatory public procurement policies on service delivery costs, for example McAfee et al (1989), Vagstad (1995), Branco (2002), Naegelen et al (1998), Nakabayashi (2013), Brulhart et al (2004), Marion (2007) and Krasnokutskaya and Seim (2011). Other studies have focused on how the costs of public service delivery are affected by a specific element of public procurement such as publicity (Coviello and Mariniello, 2014;Lewis-Faupel et al, 2016), incentives for accelerated delivery (Lewis et al, 2011), audits (Di Tella and Schardgordsky, 2003;Olken 2007), reputational mechanism (Spagnolo 2009) and competition (Estache and Iimi, 2008;Ohashi 2009).…”