Abstract:
The United States government manages a wide range of programs directing federal contracts to firms on the basis of criteria other than commercial suitability. Examples include goals for the percentage of contracts awarded to small businesses, preferential treatment to minority business owners and grants to small businesses for research and development. The objective of this study is to examine the effect of such programs on economic outcomes. Economic theory implies two competing hypotheses. Directing contracts based on firm characteristics orthogonal to commercial suitability may encourage rent seeking and other counterproductive behavior. Alternatively, entrenched incumbents or historical patterns of discrimination may have left “money on the table” in the form of smaller, more productive firms that are excluded from competition. This analysis examines which of these theories predominates by examining firm-level outcomes of preferential contracting programs. It incorporates contracting data from the Federal Procurement Data System with performance measures in the National Establishment Time Series to generate a comprehensive data set which I then analyze through a variety of quasi-experimental methods. The results are broadly consistent across programs and model specifications, suggesting the rent-seeking hypothesis, rather than the “money-on-the-table” hypothesis, predominates. With few exceptions, preferential contracting programs tend to inhibit growth in the overall population of participating firms and to encourage rent seeking and strategic behavior.
