Government Procurement and Access to Credit: Firm Dynamics and Aggregate Implications

• Department of Economics

In this seminar, Josep Pijoan Mas (CEMFI) will present the paper: "Government Procurement and Access to Credit: Firm Dynamics and Aggregate Implications."

We provide a framework to study how different allocation systems of public procurement affect firm dynamics and long-run macroeconomic outcomes. We build a newly created panel dataset of administrative data for Spain that merges credit register loan data, quasi-census firm-level data, and public procurement projects. We show evidence consistent with the hypothesis that procurement contracts provide valuable collateral for firms, and more so than sales to the private sector. We then build a model of firm dynamics with both asset-based 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 their net impact on aggregate output is ambiguous. These policies help small firms grow and overcome financial constraints, which increases output in the long run. However, they also reduce saving incentives for large firms, decreasing output. The relative extent of these two forces and hence which of them dominates crucially depends on the type of financial frictions and the specific way the policy is implemented.

Co-authors: Julian di Giovanni (Federal Reserve Bank of New York, ICREA, Universitat Pompeu Fabra, Barcelona GSE, CREI and CEPR), Manuel García-Santana (Universitat Pompeu Fabra and CEPR), Priit Jeenas (Universitat Pompeu Fabra, CREI, Barcelona School of Economics) and Enrique Moral-Benito (Banco de España).