Affirmative Action Exemptions and Capacity Constrained Firms

Abstract

This paper studies how affirmative action exemptions in public procurement can improve efficiency and government expenditures without harming disadvantaged business enterprise (DBE) utilization. I examine a unique program employed by the Iowa Department of Transportation, where prior to 2013 prime contractors were allowed an exemption from a project's affirmative action requirement if their history of DBE utilization was sufficiently high. I find that prime contractors use the exemption to smooth demands on capacity constrained DBEs, building a history of utilization during low demand periods and exploiting the resulting exemption during high demand. The exemption policy was unexpectedly eliminated in 2013, which I exploit to evaluate its effect on DBE utilization and procurement costs. I find that average DBE utilization was unchanged and bids rose on affirmative action contracts. (JEL D22, H76, J15, J16)