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

Jun Nakabayashi

Research output: Contribution to journalArticlepeer-review

26 Citations (Scopus)

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 additional costs to government procurement budgets. In this paper, the extent to which small business set-asides increased 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 nonparametric estimation of an asymmetric first-price auction model with affiliated private values, a counterfactual analysis is undertaken to demonstrate that approximately 40. percent of SMEs would exit the procurement market if set-asides were removed. Surprisingly, the resulting lack of competition would increase government procurement costs more than it would offset the production cost inefficiency.

Original languageEnglish
Pages (from-to)28-44
Number of pages17
JournalJournal of Public Economics
Volume100
DOIs
Publication statusPublished - 2013 Apr

Keywords

  • Nonparametric estimation
  • Procurement auctions
  • Small business set-asides

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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