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

• Authors: Priit Jeenas and Manuel García-Santana.
• BSE Working Paper: 112290 | February 22
• Keywords: financial frictions , aggregate productivity , Government procurement , capital accumulation
• JEL codes: E22, E23, E62, G32
• financial frictions
• aggregate productivity
• Government procurement
• capital accumulation

We provide a framework to study how public procurement affects the macroeconomy. Merging firm and procurement contract level data, we find evidence consistent with procurement acting as collateral for firms and facilitating long-run firm growth. We build a firm-dynamics model with asset- and earnings-based borrowing constraints and a government purchasing goods and services to analyze selection into procurement and firm dynamics after winning procurement contracts. We use the model to study the macroeconomic effects of expenditure-neutral policy reforms promoting small firms’ participation in procurement and show how the impact on economic activity depends on the specific features of the reforms.