Directing Government Procurement as an Incentive of Production

Abstract

Due to the inefficacy of current government procurement policy (Baldwin [1970, 1984], Baldwin and Richardson [1971], and Miyagiwa [1991]), a new policy scheme that embodies the incentive of production is proposed in this paper. The policy, which ties positively the government purchase from each of the domestic firms to its sales to consumers, is found to have the effects of increasing domestic output and reducing imports. Moreover, the optimal policy is such that it induces the domestic firms to produce at the socially optimal level.