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The New York Innovation Center bridges the worlds of finance, technology, and innovation and generates insights into high-value central bank-related opportunities.
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February 2022 Revised June 2023
JEL classification: E22, E23, E62, G32
Authors: Julian di Giovanni, Manuel García-Santana, Priit Jeenas, Enrique Moral-Benito, and Josep Pijoan-Mas
This paper provides a framework to study how different allocation systems of public procurement contracts affect firm dynamics and long-run macroeconomic outcomes. We build a novel panel data set for Spain that merges public procurement data, credit register loan data, and quasi-census firm-level data. We provide evidence consistent with the hypothesis that procurement contracts act as collateral for firms and help them grow out of their financial constraints. We then build a model of firm dynamics with asset and earnings-based borrowing constraints and a government that buys goods and services from private sector firms and use it to quantify the long-run macroeconomic consequences of alternative procurement allocation systems. We find that policies that promote the participation of small firms have sizeable macroeconomic effects, but the net impact on aggregate output is ambiguous. While these policies help small firms grow and overcome financial constraints, which increases output in the long run, these policies also increase the cost of government purchases and reduce saving incentives for large firms, decreasing the effective provision of public goods and output in the private sector, respectively. The relative importance of these forces depends on how the policy is implemented and the type and strength of financial frictions.
