Subcontracting Requirements and the Cost of Government Procurement

Government procurement auctions can be subject to policies that specify, as a percentage of the total project, a subcontracting requirement for the utilization of historically disadvantaged firms. This paper studies how these subcontracting policies affect auction outcomes using administrative data from New Mexico’s Disadvantaged Business Enterprise (DBE) program. Through the use of a procurement auction model with endogenous subcontracting, I show that subcontracting requirements need not correspond to higher procurement costs – even when disadvantaged firms are more costly. I find small differences in procurement costs as a result of New Mexico’s current policy