Small Business Set-asides in Procurement Auctions: An Empirical Analysis

Jun Nakabayashi

Global COE Hi-Stat Discussion Paper Series from Institute of Economic Research, Hitotsubashi University

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.

Keywords: procurement auctions; small business set-asides; structural estimation of auctions (search for similar items in EconPapers)
JEL-codes: D44 H23 H57 L74 (search for similar items in EconPapers)
Date: 2010-03
New Economics Papers: this item is included in nep-ent
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Related works:
Journal Article: Small business set-asides in procurement auctions: An empirical analysis (2013)
Working Paper: Small Business Set-asides in Procurement Auctions: An Empirical Analysis (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:hst:ghsdps:gd09-126

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