The Price of Protecting Small Firms¶
Evidence from Public Procurement
Insper Institute of Education and Research, Sao Paulo, Brazil
R$ 50--85 million Fiscal cost of SME-only tender restrictions for group 65 alone (18-month pre-period, real to nominal range)
Abstract¶
Governments worldwide restrict public tenders to small and medium-sized enterprises (SMEs), yet the fiscal cost of this policy is virtually unknown. I exploit a natural experiment in Sao Paulo, Brazil, where the policy operates through opt-out costs: public buyers that wish to conduct open tenders must justify their choice to audit courts, effectively penalizing the efficient procurement decision. Until March 2018, medical supplies were uniquely exempt from these costs. When a legal reinterpretation---unrelated to procurement outcomes---ended this exemption, it created a clean difference-in-differences in reverse (DiDiR) design. Open tenders yielded prices 7--13% lower (12--13% nominal, 7--10% in real terms) and attracted 19% more firms, but a Gelbach decomposition reveals that increased participation explains only 6% of the price reduction---most of the savings come from fiercer competition among bidders. The fiscal cost for one product group alone is R$50--85 million over 18 months, depending on the inflation adjustment. These costs are concentrated among standardized goods; for specialized items, restrictions appear less distortionary. The one clear benefit: SME-only tenders successfully promote local sourcing.
JEL Classification: H32 H57 L26 L53 O12 R12
Keywords: public procurement SMEs policy costs restricted tenders Brazil
Key Findings¶
SME restrictions raise procurement prices by 7--13%
Open tenders for Group 65 yielded 7--13% lower prices (12--13% nominal, 7--10% IPCA-deflated) compared to SME-restricted tenders, after controlling for item and buyer fixed effects.
R$ 84.5--85.8 million in fiscal costs (one product group)
The fiscal cost of SME-only restrictions for Group 65 alone amounts to ~12% of this product group's total procurement value over 18 months (~US$17 million). A rough extrapolation to all product groups yields ~R$310 million (~US$62 million).
Competition declines under SME restrictions
Open tenders attracted 19--20% more participating firms and 16--17% more valid bids in the short term, with effects attenuating as PBUs adapt to restricted tender rules.
Costs concentrated in high-value items
The price effect is 40% larger for high-value items (above median), where the pool of capable non-SME suppliers is broader. Quantile DiD reveals costs concentrated at lower price quantiles.
Local suppliers benefit from the policy
Before the policy change, winning firms for Group 65 were 5--11 km more distant from PBUs, suggesting that SME-only tenders successfully encouraged local supplier participation.