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

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

No 17023, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This paper examines the macroeconomic effects of public procurement. We exploit novel data to show that procurement eases firms’ borrowing constraints and has persistent effects on firm growth. Using a macroeconomic model with heterogeneous firms, asset- and earnings-based borrowing frictions, and government purchasing, we simulate revenue-neutral reforms that increase the share of small firms in procurement. We find that, despite helping financially constrained firms grow, these policies lead to non-trivial unintended negative effects. On net, the policies lead to a modest decline in GDP. The findings highlight how procurement design influences aggregate outcomes through firm-level financial frictions and reallocation dynamics.

Keywords: Financial frictions; Aggregate productivity; Government procurement; Capital accumulation (search for similar items in EconPapers)
JEL-codes: E22 E23 E62 G32 (search for similar items in EconPapers)
Date: 2022-02
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