Staff Reports
Government Procurement and Access to Credit: Firm Dynamics and Aggregate Implications
Number 1006
February 2022 Revised June 2022

JEL classification: E22, E23, E62, G32

Authors: Julian di Giovanni, Manuel García-Santana, Priit Jeenas, Enrique Moral-Benito, and Josep Pijoan-Mas

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 data set 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.

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AUTHOR DISCLOSURE STATEMENT(S)
Julian di Giovanni
I declare that I have no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York’s review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.

Manuel García-Santana
I declare that I have no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York’s review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.

Priit Jeenas
I declare that I have no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York’s review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.

Enrique Moral-Benito
I declare that I have no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York’s review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.

Josep Pijoan-Mas
I declare that I have no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York’s review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
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