Economics of Procurement: Topics in Public Procurement

Economics of Procurement: Topics in Public Procurement Leonardo M. Giuffrida November 29, 2017 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 1 / 1/33

Preference Programs leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 2 / 33 2/33

The Role of Small Businesses (SBs) in the Economy leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 3 / 33 3/33

The Role of Small Businesses (SBs) in the Economy SBs play an important role in any economy. leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 3 / 33 3/33

The Role of Small Businesses (SBs) in the Economy SBs play an important role in any economy. Once first established, SBs represent ways that owners test their ideas in a market. leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 3 / 33 3/33

The Role of Small Businesses (SBs) in the Economy SBs play an important role in any economy. Once first established, SBs represent ways that owners test their ideas in a market. Surviving firms provide economic stability for owners, their families, and, possibly, workers. leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 3 / 33 3/33

The Role of Small Businesses (SBs) in the Economy SBs play an important role in any economy. Once first established, SBs represent ways that owners test their ideas in a market. Surviving firms provide economic stability for owners, their families, and, possibly, workers. Large businesses (LBs) may dominate the stock market, but it s SBs that keep economy moving. leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 3 / 33 3/33

The Role of Small Businesses (SBs) in the Economy (cont d) leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 4 / 33 4/33

The Role of Small Businesses (SBs) in the Economy (cont d) Job creation and economic growth driver in smaller geographic areas leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 4 / 33 4/33

The Role of Small Businesses (SBs) in the Economy (cont d) Job creation and economic growth driver in smaller geographic areas New competition into previously stale areas. leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 4 / 33 4/33

The Role of Small Businesses (SBs) in the Economy (cont d) Job creation and economic growth driver in smaller geographic areas New competition into previously stale areas. SBs operate locally with strong preference for hiring local people (LBs often move into new territory with a team already in place). SBs also have more flexibility, and can be started by almost anyone. That makes them more diverse in form, function, culture, and potential than LBs. The greater diversity in the economy, the easier it is for the economy to withstand tough conditions. leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 4 / 33 4/33

The Role of Small Businesses (SBs) in the Economy (cont d) Job creation and economic growth driver in smaller geographic areas New competition into previously stale areas. SBs operate locally with strong preference for hiring local people (LBs often move into new territory with a team already in place). SBs also have more flexibility, and can be started by almost anyone. That makes them more diverse in form, function, culture, and potential than LBs. The greater diversity in the economy, the easier it is for the economy to withstand tough conditions. Many SBs eventually fail. That turnover gives the community a chance to learn, recover, and rebuild, which is beneficial in the long run, driving even more new growth. leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 4 / 33 4/33

Survival Rate of U.S. New-born Firms leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 5 / 33 5/33

SB Facts 1 Small-medium Enterprise are defined in the EU recommendation 2003/361. 2 Source: European Commission leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 6 / 33 6/33

SB Facts They represent 99% of all businesses in the EU. 1 In 2011-2016 accounted for 85% of new jobs and two-thirds of the total private sector employment in the EU. 2 1 Small-medium Enterprise are defined in the EU recommendation 2003/361. 2 Source: European Commission leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 6 / 33 6/33

SB Facts They represent 99% of all businesses in the EU. 1 In 2011-2016 accounted for 85% of new jobs and two-thirds of the total private sector employment in the EU. 2 In the U.S., SBs provided 55% of all jobs and 66% of all net new jobs since the 1970s. 1 Small-medium Enterprise are defined in the EU recommendation 2003/361. 2 Source: European Commission leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 6 / 33 6/33

SB Facts They represent 99% of all businesses in the EU. 1 In 2011-2016 accounted for 85% of new jobs and two-thirds of the total private sector employment in the EU. 2 In the U.S., SBs provided 55% of all jobs and 66% of all net new jobs since the 1970s. Since 1982, the number of SBs across in the U.S. has increased a 49%. While LBs have downsized by nearly 4 million employees, SBs have added 8 million jobs. 1 Small-medium Enterprise are defined in the EU recommendation 2003/361. 2 Source: European Commission leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 6 / 33 6/33

SB Facts They represent 99% of all businesses in the EU. 1 In 2011-2016 accounted for 85% of new jobs and two-thirds of the total private sector employment in the EU. 2 In the U.S., SBs provided 55% of all jobs and 66% of all net new jobs since the 1970s. Since 1982, the number of SBs across in the U.S. has increased a 49%. While LBs have downsized by nearly 4 million employees, SBs have added 8 million jobs. To sum up: Responsible for most of the job creation, economic growth and technical innovations in modern economies. 1 Small-medium Enterprise are defined in the EU recommendation 2003/361. 2 Source: European Commission leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 6 / 33 6/33

Share of Employees in firms with 1-9 Employees, 2007 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 7 / 33 7/33

Share of Employees in firms with 1-50 Employees, 2007 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 8 / 33 8/33

US Employment trend by firm size leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 9 / 33 9/33

U.S. SB Employment Share by Industry 10/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 10 / 33

Why do SBs fail? 11/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 11 / 33

Why do SBs fail? Choosing a not profitable business. 11/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 11 / 33

Why do SBs fail? Choosing a not profitable business. Insufficient ready capital and/or financing 11/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 11 / 33

Why do SBs fail? Choosing a not profitable business. Insufficient ready capital and/or financing Inadequate cash reserves. 11/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 11 / 33

Why do SBs fail? Choosing a not profitable business. Insufficient ready capital and/or financing Inadequate cash reserves. No market experience 11/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 11 / 33

Why do SBs fail? Choosing a not profitable business. Insufficient ready capital and/or financing Inadequate cash reserves. No market experience Failure to price your product or service correctly. Failure to adequately anticipate cash flow. 11/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 11 / 33

Why do SBs fail? Choosing a not profitable business. Insufficient ready capital and/or financing Inadequate cash reserves. No market experience Failure to price your product or service correctly. Failure to adequately anticipate cash flow. Failure to anticipate or react to competition, technology, or other changes in the marketplace. 11/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 11 / 33

Why do SBs fail? Choosing a not profitable business. Insufficient ready capital and/or financing Inadequate cash reserves. No market experience Failure to price your product or service correctly. Failure to adequately anticipate cash flow. Failure to anticipate or react to competition, technology, or other changes in the marketplace. Overdependence on a single customer. 11/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 11 / 33

Why do SBs fail? Choosing a not profitable business. Insufficient ready capital and/or financing Inadequate cash reserves. No market experience Failure to price your product or service correctly. Failure to adequately anticipate cash flow. Failure to anticipate or react to competition, technology, or other changes in the marketplace. Overdependence on a single customer. No division of roles and responsibilities. 11/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 11 / 33

Why do SBs fail? Choosing a not profitable business. Insufficient ready capital and/or financing Inadequate cash reserves. No market experience Failure to price your product or service correctly. Failure to adequately anticipate cash flow. Failure to anticipate or react to competition, technology, or other changes in the marketplace. Overdependence on a single customer. No division of roles and responsibilities. Putting up with inadequate management. 11/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 11 / 33

Advantages of LBs over SBs 12/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 12 / 33

Advantages of LBs over SBs Economies of scale 12/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 12 / 33

Advantages of LBs over SBs Economies of scale Political clout 12/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 12 / 33

Advantages of LBs over SBs Economies of scale Political clout Specialization of roles 12/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 12 / 33

Advantages of LBs over SBs Economies of scale Political clout Specialization of roles Set policies and procedures 12/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 12 / 33

Advantages of LBs over SBs Economies of scale Political clout Specialization of roles Set policies and procedures More opportunities for advancement 12/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 12 / 33

Advantages of LBs over SBs Economies of scale Political clout Specialization of roles Set policies and procedures More opportunities for advancement More diversified revenue streams/risk profile Perceived employment stability and/or prestige 12/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 12 / 33

Advantages of LBs over SBs Economies of scale Political clout Specialization of roles Set policies and procedures More opportunities for advancement More diversified revenue streams/risk profile Perceived employment stability and/or prestige Specialized capabilities/knowledge that are barriers to entry 12/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 12 / 33

Advantages of LBs over SBs Economies of scale Political clout Specialization of roles Set policies and procedures More opportunities for advancement More diversified revenue streams/risk profile Perceived employment stability and/or prestige Specialized capabilities/knowledge that are barriers to entry Branding and history 12/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 12 / 33

Disadvantages of LBs over SBs Bureaucracy 13/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 13 / 33

Disadvantages of LBs over SBs Bureaucracy Lawsuit magnets 13/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 13 / 33

Disadvantages of LBs over SBs Bureaucracy Lawsuit magnets Market saturation 13/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 13 / 33

Disadvantages of LBs over SBs Bureaucracy Lawsuit magnets Market saturation Individual employee disconnection from success 13/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 13 / 33

Disadvantages of LBs over SBs Bureaucracy Lawsuit magnets Market saturation Individual employee disconnection from success Lack of clear vision/direction 13/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 13 / 33

Disadvantages of LBs over SBs Bureaucracy Lawsuit magnets Market saturation Individual employee disconnection from success Lack of clear vision/direction Risk aversion 13/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 13 / 33

Disadvantages of LBs over SBs Bureaucracy Lawsuit magnets Market saturation Individual employee disconnection from success Lack of clear vision/direction Risk aversion Mediocrity 13/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 13 / 33

Small Businesses and PP 14/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 14 / 33

Small Businesses and PP At the initial stages, SBs launch into industries dominated by major players and impenetrable by most of SBs. How could they compete with their bigger counterparts? One of the most direct ways the government can nurture small businesses is through PP. 14/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 14 / 33

Small Businesses and PP At the initial stages, SBs launch into industries dominated by major players and impenetrable by most of SBs. How could they compete with their bigger counterparts? One of the most direct ways the government can nurture small businesses is through PP. The general idea is to create demand for SBs products and favor newborn firms development so as to foster future competition in the market. 14/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 14 / 33

Change in the volume if SB vs LB Loans 15/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 15 / 33

Fostering SB growth through PP 16/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 16 / 33

Fostering SB growth through PP To encourage SBs concerns to obtain and perform public contracts, the government mainly use two strategies: 16/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 16 / 33

Fostering SB growth through PP To encourage SBs concerns to obtain and perform public contracts, the government mainly use two strategies: 1 set-asides 2 preference programs 16/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 16 / 33

U.S. institutional framework 17/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 17 / 33

U.S. institutional framework The SB Act of 1953 states that SBs should 17/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 17 / 33

U.S. institutional framework The SB Act of 1953 states that SBs should 1 receive a fair proportion of federal contracts 17/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 17 / 33

U.S. institutional framework The SB Act of 1953 states that SBs should 1 receive a fair proportion of federal contracts 2 have the maximum practical opportunity to participate in federal contracting Congress has established a 23% governmentwide goal for awards of contracts to SBs. Subsets of the SBs goal are a governmentwide goal for awards to small disadvantaged businesses (5%), women-owned small businesses (5%), historically underutilized business zone small businesses (3%), and to service-disabled veteran-owned small businesses (3%). 17/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 17 / 33

U.S. institutional framework (cont d) 18/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 18 / 33

U.S. institutional framework (cont d) Each year the SBA negotiates agency goals with each department and agency. 18/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 18 / 33

U.S. institutional framework (cont d) Each year the SBA negotiates agency goals with each department and agency. These agency goals may be higher or lower than the governmentwide goals, depending on the types of supplies and services the particular agency acquires. 18/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 18 / 33

Small Business Set Aside 19/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 19 / 33

Small Business Set Aside The small business set-aside (SBSA) is the most common socioeconomic program. It restricts ( sets aside ) competition for contracts exclusively to small business participation. SBSA are routinely used in countries like the U.S., Canada or Japan. In the U.S., only businesses that do not exceed prescribed size standards for the supply or service being acquired are considered small and are allowed to bid or propose on SBSAs. 19/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 19 / 33

Small Business Set Aside The small business set-aside (SBSA) is the most common socioeconomic program. It restricts ( sets aside ) competition for contracts exclusively to small business participation. SBSA are routinely used in countries like the U.S., Canada or Japan. In the U.S., only businesses that do not exceed prescribed size standards for the supply or service being acquired are considered small and are allowed to bid or propose on SBSAs. Bidders or offerors that exceed the applicable size standard for a particular small business set-aside are, by definition, nonresponsive and their bids or proposals will be rejected. 19/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 19 / 33

Rule of two 20/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 20 / 33

Rule of two How do the contracting officer decide whether to set aside or not? 20/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 20 / 33

Rule of two How do the contracting officer decide whether to set aside or not? Paragraph (a) of Federal Acquisition Regulation (FAR) 19.502-2, states that: [purchases] shall be set aside for small business unless the contracting officer determines there is not a reasonable expectation of obtaining offers from two or more responsible small business concerns that are competitive in terms of market prices, quality, and delivery. 20/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 20 / 33

Rule of two How do the contracting officer decide whether to set aside or not? Paragraph (a) of Federal Acquisition Regulation (FAR) 19.502-2, states that: [purchases] shall be set aside for small business unless the contracting officer determines there is not a reasonable expectation of obtaining offers from two or more responsible small business concerns that are competitive in terms of market prices, quality, and delivery. This requirement is commonly called the rule of two, and it applies to all purchases that exceed the micro-purchase threshold ($ 3,000). 20/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 20 / 33

Size Standards 21/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 21 / 33

Size Standards The SBA establishes small business size standards on an industry-byindustry basis. 21/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 21 / 33

Size Standards The SBA establishes small business size standards on an industry-byindustry basis. It uses the North American Industry Classification System (NAICS) codes to identify the various industries. The most prevalent size standard for manufacturing industries is 500 employees, and the most prevalent size standard for service industries is $7.0 million in average annual gross revenue over the last three fiscal years. A company that does not exceed these size standards is considered small. 21/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 21 / 33

Size Standards (cont d) 22/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 22 / 33

Size Standards (cont d) The SBA sets these size standards after determining the average size of the firms in each industry and the amount of competition within each industry. 22/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 22 / 33

Size Standards (cont d) The SBA sets these size standards after determining the average size of the firms in each industry and the amount of competition within each industry. The purpose of setting the size standard at these levels is to allow SBs to grow into thriving medium businesses before losing the benefits of their small business size status. 22/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 22 / 33

Size Standards (cont d) The SBA sets these size standards after determining the average size of the firms in each industry and the amount of competition within each industry. The purpose of setting the size standard at these levels is to allow SBs to grow into thriving medium businesses before losing the benefits of their small business size status. The contracting officer s selection can determine whether a company is allowed to participate in a small business set-aside. 22/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 22 / 33

Dissolving SBSA 23/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 23 / 33

Dissolving SBSA If the contracting officer determines that none of the bids or proposals are reasonable or none of the bidders or offerors are responsible, he dissolves the set-aside and resolicits without any size restrictions. 23/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 23 / 33

Dissolving SBSA If the contracting officer determines that none of the bids or proposals are reasonable or none of the bidders or offerors are responsible, he dissolves the set-aside and resolicits without any size restrictions. However, as a rule, the prices must be exceedingly unreasonable before a contracting officer will dissolve a set-aside. This is because most contracting officers do not want to resolicit and, consequently, incur additional delay and administrative expenses. 23/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 23 / 33

Denes (1997) Setting: federal dredging contracts 1990-1991. The paper: Examinination of the mean values of SBSA bids compared with the mean values of the unrestricted bids. Results: No significant difference between the bids submitted for setasides and the bids submitted on the related auctions with unrestricted solicitations. 24/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 24 / 33

Nakabayashi (2013) Setting: Japanese public construction projects, where approximately half of the procurement budget is set aside for SBs. The Paper: Examination of the extent to which SBSAs increased government procurement costs. Result: 40% of SBs would exit the procurement market if SBSAs were removed. The resulting lack of competition would increase government procurement costs more than it would offset the production cost inefficiency. 25/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 25 / 33

Athey, Coey, Levin (2013) Setting: US Forest Service timber auctions The paper: Analysis of a SBSA scheme. Results 1: Their estimates suggest that restricting entry substantially reduces efficiency and revenue, although it increases SB participation. Results 2: An alternative policy of subsidizing SBs would increase revenue and SB profit, with little efficiency cost. 26/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 26 / 33

Preference Programs 27/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 27 / 33

Preference Programs Definition: Bid preferences in procurement tenders allow firms from an identifiable group an advantage in bidding against unfavored firms. 27/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 27 / 33

Preference Programs Definition: Bid preferences in procurement tenders allow firms from an identifiable group an advantage in bidding against unfavored firms. It does not restrict competition to SBs ex ante Firms that are small disadvantaged businesses (SDB) may benefit from two programs described in FAR Subpart 19.12: 27/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 27 / 33

Preference Programs Definition: Bid preferences in procurement tenders allow firms from an identifiable group an advantage in bidding against unfavored firms. It does not restrict competition to SBs ex ante Firms that are small disadvantaged businesses (SDB) may benefit from two programs described in FAR Subpart 19.12: an evaluation factor for the participation of SDBs in performance of the contract 27/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 27 / 33

Preference Programs Definition: Bid preferences in procurement tenders allow firms from an identifiable group an advantage in bidding against unfavored firms. It does not restrict competition to SBs ex ante Firms that are small disadvantaged businesses (SDB) may benefit from two programs described in FAR Subpart 19.12: an evaluation factor for the participation of SDBs in performance of the contract an SDB incentive subcontracting program. 27/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 27 / 33

How firm is labeled as disadvantage? 28/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 28 / 33

How firm is labeled as disadvantage? To obtain a benefit from either of these SDB programs, a firm must meet the following qualifications: 28/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 28 / 33

How firm is labeled as disadvantage? To obtain a benefit from either of these SDB programs, a firm must meet the following qualifications: It does not exceed the applicable SB size standard corresponding to the NAICS code of to its primary business activity. At least 51% of the firm is owned and controlled by a socially and economically disadvantaged individual or individuals. To qualify as socially disadvantaged, an individual must be an U.S. citizen and either be a member of a group that is presumed to be socially disadvantaged (that is, be a Black American, Hispanic American, etc), or show by a preponderance of evidence that he is socially disadvantaged because of race, ethnicity, gender, physical handicap, or residence in an environment isolated from the mainstream of American society. 28/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 28 / 33

How firm is labeled as disadvantage? To obtain a benefit from either of these SDB programs, a firm must meet the following qualifications: It does not exceed the applicable SB size standard corresponding to the NAICS code of to its primary business activity. At least 51% of the firm is owned and controlled by a socially and economically disadvantaged individual or individuals. To qualify as socially disadvantaged, an individual must be an U.S. citizen and either be a member of a group that is presumed to be socially disadvantaged (that is, be a Black American, Hispanic American, etc), or show by a preponderance of evidence that he is socially disadvantaged because of race, ethnicity, gender, physical handicap, or residence in an environment isolated from the mainstream of American society. To qualify as economically disadvantaged, an individual must have net worth less than $750,000. 28/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 28 / 33

Marion (2007) Setting: highway procurement auctions by the California Department of Transportation The paper: Investigation of the effect of the bid preference program. Results 1: By granting a bid credit to higher-cost bidders, the government loses surplus from lower-cost bidders by awarding contracts to likely higher-cost competitors. Result 2: the preferential treatment increases the competitive pressure exerted by favored bidders. 29/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 29 / 33

Krasnokutskaya and Seim (2011) Setting: highway procurement auctions by the California Department of Transportation The paper: Empirical investigation on bid preference programs. Result: program substantially raises the SBs probabilities of winning and participation but results in a small increase in the government procurement cost. 30/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 30 / 33

Marion (2009) Setting: highway procurement auctions by the California Department of Transportation The paper: investigates the effect of disadvantaged business enterprise subcontractor goals on the winning bids for contracts using California s Proposition 209, which prohibited the consideration of race or gender in awarding state-funded contracts. Result 1: After Proposition 209, prices on state-funded contracts fell by 5.6% relative to federally funded projects, for which preferences still applied. Result 2: Most of the price decline after Proposition 209 resulted from the mix of subcontractors employed, which seems to arise from the higher costs of firms located in high-minority areas. 31/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 31 / 33

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Messages from our classes 33/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 33 / 33

Messages from our classes PP is effective in spurring innovation 33/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 33 / 33

Messages from our classes PP is effective in spurring innovation There is need and room for better PP bureaucracy 33/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 33 / 33

Messages from our classes PP is effective in spurring innovation There is need and room for better PP bureaucracy Private companies (sureties) can be more effective in supervising PP process than public entities. 33/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 33 / 33

Messages from our classes PP is effective in spurring innovation There is need and room for better PP bureaucracy Private companies (sureties) can be more effective in supervising PP process than public entities. PP aims at fostering SB growth. though. No evidence on the effectiveness 33/33 leonardo.giuffrida@uniroma2.it Topics in Public Procurement November 29, 2017 33 / 33