Public Procurement and Supplier Job Creation: Insights from Auctions

Abstract

Abstract Public procurement contracts (PPCs) of goods, services, and works are about one-tenth of the global gross domestic product. Much research has been conducted on government spending and its aggregate effects, but the evidence is scarce at the micro-level. We exploit sealed-bid PPC auctions of construction works, discontinuity in bidders’ win margin, and firms’ daily employment variation to provide a causal estimate of winning a PPC on firms’ employment. Winning a PPC has a small positive impact on a firm’s short-run employment. We investigate mechanisms and heterogeneity that can explain the small initial magnitudes. We find no compelling evidence in favor of political connections, an information leakage channel, or PPC size as explanations for the small magnitude. Our investigation of a longer period shows that the impact phases out in less than a year. The lack of a long-term impact is due to runners-up winning more PPCs and runners-up substituting for more market revenue in the year after closely losing a PPC. Finally, the impacts are concentrated in construction firms that conduct most contracted work in-house. The final estimation shows the effect is 3.7 new employees per PPC with a public cost per job created at €58,600 (€49,800–€65,100).