Letting Luck Decide: Government Procurement and the Growth of Small Firms

Milenko Fadic

Journal of Development Studies, 2020, vol. 56, issue 7, 1263-1276

Abstract: Iestimate the causal effects of demand shocks, stemming from government procurement, on the growth of small firms in Ecuador. I assemble a unique dataset using several new administrative sources and, as identification strategy, exploit a governmental procurement process that allocates public contracts through a randomised contest. I find a positive and significant effect of demand shocks on firm growth. On average, an increase in demand of 10 per cent will increase wage expenses and fixed assets by approximately 5 per cent during the year of the shock. I also find no evidence of spillover effects from demand shocks on sales to the public or private sector. Finally, as in other studies, I show that demand positively impacts firm growth but, contrary to other findings, this effect is temporary and only observed during the year of the shock.

Date: 2020
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DOI: 10.1080/00220388.2019.1666979

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