The Price of Exclusion¶
SME Set-Asides in Public Procurement
Insper Institute of Education and Research, Sao Paulo, Brazil
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JPubE submission — May 2026.
28.9% static welfare loss from the full SME set-aside in standardized non-pharmaceutical procurement, at λ=0.30 — with the exclusion of non-SMEs accounting for ~72% of the price decomposition
Abstract¶
Set-asides expand small-firm access to public procurement by removing rival bidders from the auction. When the excluded bidders are the ones forming the price, the policy replaces competition with eligibility at a high static cost. I study São Paulo's centralized electronic procurement platform, where a legal reinterpretation expanded SME-only tendering into medical and hospital supplies. The platform's reverse auctions record losing bidders' drop-out prices, which reveal willingness to supply; I use them to split the set-aside price effect into the competitive discipline lost when non-SMEs are excluded and the offset from the post-policy SME pool. In standardized non-pharmaceutical markets the protected pool responds but does not replace the lost discipline: the full set-aside generates a static welfare loss of 28.9 percent of the open-regime price at λ=0.30. Pharmaceutical procurement shows larger but more model-sensitive losses. A 10 percent SME price preference keeps non-SMEs in the auction at near-zero price cost while delivering less redistribution. The relevant frontier is not SME support versus none; it runs between exclusionary redistribution and support that preserves the price-forming pool.
JEL Classification: H32 H57 L26 L53 D44
Keywords: public procurement SME set-asides auctions welfare
Key Findings¶
Exclusion dominates the price decomposition
Removing non-SMEs while holding the pre-policy SME pool fixed (the Δexcl channel) accounts for ~72% of the price decomposition in absolute magnitude in standardized non-pharmaceutical procurement. The post-policy protected pool responds (SME participation roughly doubles) but does not recreate the price discipline supplied by the excluded non-SMEs.
Static welfare cost of the full set-aside: 28.9% in standardized markets
At a marginal cost of public funds of λ=0.30, the full SME-only regime generates a static welfare loss of 28.9% of the open-regime price in standardized non-pharmaceutical procurement. Pharmaceuticals exhibit larger but more composition-sensitive losses, reported as a boundary case.
A 10% price preference preserves the price-forming pool at near-zero static cost
Simulated as a static design benchmark, a 10 percent SME price preference keeps non-SMEs inside the auction and delivers positive SME-favoring redistribution at near-zero static welfare cost in standardized markets. The implied welfare weight required for a planner to prefer the full set-aside is 2.42 in non-pharmaceuticals.
Pharmaceutical procurement is a boundary case, not a second headline
The protected pool is thinner, composition changes more under the policy, and the welfare ranking becomes sensitive to how the post-policy SME pool is modeled. The non-pharmaceutical ranking is stable across the main and strict-invariance specifications; the pharmaceutical ranking is not.