Buy Big or Buy Small? Procurement Policies, Firms' Financing, and the Macroeconomy

Julian di Giovanni, Manuel Garcia-Santana, Priit Jeenas, Enrique Moral-Benito and Josep Pijoan-Mas

No 1006, Staff Reports from Federal Reserve Bank of New York

Abstract: This paper provides a framework to study how different allocation systems of public procurement contracts affect firm dynamics and long-run macroeconomic outcomes. We build a novel panel data set for Spain that merges public procurement data, credit register loan data, and quasi-census firm-level data. We provide evidence consistent with the hypothesis that procurement contracts act as collateral for firms and help them grow out of their financial constraints. We then build 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 use it to quantify the long-run macroeconomic consequences of alternative procurement allocation systems. We find 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 (search for similar items in EconPapers)
JEL-codes: E22 E23 E62 G32 (search for similar items in EconPapers)
Pages: 89
Date: 2022-02-01
New Economics Papers: this item is included in nep-ban, nep-bec, nep-cfn, nep-cta, nep-dge, nep-eff, nep-ent, nep-mac and nep-sbm
Note: Revised June 2023. Previous title: “Government Procurement and Access to Credit: Firm Dynamics and Aggregate Implications”
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Related works:
Working Paper: Buy Big or Buy Small ? Procurement Policies, Firms’ Financing, and the Macroeconomy (2023)
Working Paper: Buy Big or Buy Small? Procurement Policies, Firms' Financing, and the Macroeconomy (2022)
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