DP17023 Government Procurement and Access to Credit: Firm Dynamics and Aggregate Implications

Author(s): Julian di Giovanni, Manuel García-Santana, Priit Jeenas, Enrique Moral-Benito, Josep Pijoan-Mas
Publication Date: February 2022
Date Revised: June 2022
Keyword(s): aggregate productivity, Capital Accumulation, Financial Frictions, government procurement
JEL(s): E22, E23, E62, G32
Programme Areas: Financial Economics, International Macroeconomics and Finance, Monetary Economics and Fluctuations, Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=17023

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.