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

This Version: November, 2009As part of public procurement, many governments adopt small business programs to provide contract opportunities for businesses often with preferences for rms 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 pro tability and rm size obtained by the non-parametric estimation of asymmetric rst-price auctions with a liated 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 o set the production cost ine ciency.グローバルCOEプログラム = Global COE Progra