Buy Big or Buy Small? Procurement Policies, Firms’ Financing, and the Macroeconomy

• Authors: Julian di Giovanni, Manuel García-Santana, Priit Jeenas, Enrique Moral-Benito and Josep Pijoan-Mas
• American Economic Review..

This paper examines the macroeconomic effects of public procurement. We exploit novel data to show that procurement eases firms’ borrowing constraints and has persistent effects on firm growth. Using a macroeconomic model with heterogeneous firms, asset- and earnings-based borrowing frictions, and government purchasing, we simulate expenditure-neutral reforms that increase the share of small firms in procurement. We find that, despite helping financially constrained firms grow, these policies lead to non-trivial unintended negative effects. On net, the policies lead to a modest decline in GDP. The findings highlight how procurement design influences aggregate outcomes through firm-level financial frictions and reallocation dynamics.