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

Jun Nakabayashi

Tsukuba Economics Working Papers from Faculty of Humanities and Social Sciences, University of Tsukuba

Abstract: As part of public procurement, many governments adopt small business programs to pro- vide contract opportunities for businesses often with preferences for firms operated by mem- bers 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.

Date: 2009-03, Revised 2009-11
New Economics Papers: this item is included in nep-ppm
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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 (2010)
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