Sheltered Bidding¶
The Within-Auction Cost of SME Set-Asides
Insper Institute of Education and Research, Sao Paulo, Brazil
R$55–128M / yr (US$16–37M) annual welfare loss imposed by the SME-only set-aside on a single product group of São Paulo's R$13 billion procurement platform — roughly three-quarters of it attributable to sheltered bidding rather than to entry response. A 10% SME price preference welfare-dominates the set-aside on the same metric in standardized markets, at essentially zero fiscal cost.
Abstract¶
Why do SME set-asides raise procurement prices? Two non-exclusive mechanisms operate: the bidder pool shrinks, and the auction clears at a different point in the surviving cost distribution. This paper estimates the total impact and decomposes it into these two channels. A March 2018 reversal extended an SME-only rule to medical supplies on São Paulo's centralized procurement platform; a difference-in-differences against 76 never-treated product groups recovers a roughly 10 percent rise in winning prices and a doubling of SME participation. An asymmetric IPV model identified from Pregão drop-out bids then separates the channels under observed equilibrium entry — a policy-relevant accounting decomposition identified by the auction format plus observed entry, not a full structural entry equilibrium. The within-auction component — sheltered bidding — accounts for two-thirds to three-quarters of the simulated effect across classes. The implied welfare cost reaches R$55 million per year on a single product group of São Paulo's R$13 billion platform. A 10 percent price preference welfare-dominates the set-aside in thick standardized markets at near-zero fiscal cost; the ranking turns conditional in thin pharmaceutical markets, where the equilibrium-selection treatment of the protected pool becomes first-order. The conditional ranking is the policy-design statement: bidder exclusion is hardest to defend where the protected pool is thick and the good standardized, and most defensible — if at all — where it is not.
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Submission-ready version (v5, JPubE format) — April 2026.
JEL Classification: D44 H32 H57 L26 L53
Keywords: public procurement SME set-asides asymmetric auctions structural estimation welfare marginal cost of public funds
Headline magnitudes¶
| Non-pharma | Pharma | |
|---|---|---|
| DiD on log pfinal (absolute) | +0.10 to +0.11 | +0.10 to +0.11 |
| DiD on pfinal / pref | +0.06 | +0.06 |
| Simulated pS3 − pS1, units of pref | +0.259 | +0.308 |
| Within-auction share, main spec | 74.5% | 73.3% |
| Within-auction share, Turnbull NPMLE | 74.0% | 82.0% |
| Within-auction share, strict invariance | 85.0% | 79.0% |
| Welfare cost (% of pS1, λ = 0.30) | 28.7% | 47.0% |
| wSME★ to prefer set-aside, main spec | 2.42 | 2.61 |
| wSME★, strict invariance | > 1 | 0.7 |
DiD against 76 never-treated product groups, 18-month symmetric window around March 2018. Structural magnitudes from the asymmetric IPV counterfactual under observed equilibrium entry.
Key Findings¶
The price effect is mostly within the auction
The within-auction component — sheltered bidding — is 74.0% of the simulated total effect in non-pharma and 66.1% in pharma. The share stays in the 66--85% range across cost-distribution estimators (Turnbull NPMLE: 74, 82) and across the two specifications of the post-policy SME pool (strict invariance: 85, 79). The set-aside's price cost is mostly a property of how the surviving pool bids, not of how many firms it contains.
Endogenous SME entry attenuates a 59% larger latent shock in non-pharma, 81% in pharma
Holding the SME pool at its pre-policy size raises the simulated price effect to 159% of the realized one in non-pharma and 181% in pharma. Without endogenous entry, the set-aside would cost 59% more in price and welfare in non-pharma (81% in pharma). Participation is the government's partial offset, not the source of the markup.
A 10% price preference welfare-dominates the set-aside in non-pharma
In thick standardized markets the preference shifts simulated prices by +0.010 against +0.244 under the set-aside, at essentially zero fiscal cost. The preference dominates under both the main equilibrium-selection specification and the strict-invariance benchmark.
The pharmaceutical comparison bifurcates — and the bifurcation is the diagnostic
In thin heterogeneous pharma markets the preference dominates under the main specification, but the ranking flips under strict invariance, with the implicit welfare weight required to prefer the set-aside falling to 0.7 (vs. 2.61 under the main specification). The bifurcation pins down where the modeling treatment of the protected pool is first-order.
Three magnitudes that should not be confused
The DiD coefficient (10--11%) is the average effect on observed log winning prices. The structural counterfactual (+0.259/+0.308 of pref) is the simulated mean of the second-order statistic under each counterfactual entry profile, three to four times the DiD coefficient on the structural normalization. The welfare cost (28.7% of pS1 in non-pharma, 47.0% in pharma at λ = 0.30) adds the marginal-cost-of-public-funds distortion on top of the allocative wedge.
Quick Links¶
Paper
Manuscript description and methodology
Results
Structural decomposition, entry response, policy comparison
Robustness
Strict invariance, Fc regime, window, sample filter
Extensions
Welfare arithmetic, MCPF sensitivity, furosemida vignette
Advanced Methods
Asymmetric IPV, drop-out point ID, UH cleaning, BNE simulation