What if the policy designed to help small businesses is costing taxpayers millions?
R$50–85 million. One product group. Eighteen months.
The World’s Biggest Set-Aside
97%
of Brazilian firms are SMEs
R$80K
Threshold for mandatory SME tenders
10%
of GDP spent on public procurement
Governments everywhere reserve procurement contracts for small firms. In Brazil, federal law mandates that all items under R$80,000 go to SME-only tenders. The goal is noble: jobs, local development, innovation. But nobody has measured what it costs.
The Opt-Out Trap
📝
Justify to audit courts
⚖
Risk personal sanctions
📄
Costly paperwork
🚫
Default: SME-only
Want to run an open tender instead? You must justify it to the audit court, risk sanctions, and file extensive paperwork. These opt-out costs make the restricted tender the path of least resistance—even when open competition would save money.
The Exception That Proves the Cost
Before March 2018
🔓
Group 65 (medical supplies) exempt from SME restriction. Open tenders by default.
After March 2018
🔒
Group 65 loses exemption. Subject to SME-only rules like everyone else.
For years, São Paulo exempted medical supplies from mandatory SME tenders—they were considered strategic goods. Then in March 2018, a legalistic reinterpretation ended the exemption. Not because prices were bad. Because of a principle of isonomy. A natural experiment.
What Open Competition Was Worth
7–13%
lower prices under open tenders. Same items. Same buyers. Same platform. 12–13% in nominal terms, 7–10% after adjusting for inflation. Either way: two to three times larger than estimates from US highway procurement.
More Firms, More Bids, Further Reach
+19%
Participating firms
+16%
Valid bids
+5–11 km
Winner distance
Open tenders attracted more competitors, generated more valid proposals, and drew suppliers from further away. But a caveat: the placebo tests show pre-trends for firms and bids. Only the price result passes the placebo cleanly.
The Surprising Mechanism
More firms entering
6%
of price reduction
Fiercer bidding
94%
of price reduction
A Gelbach decomposition reveals that more firms is not the story. Only 6% of the price reduction comes from additional entry. The other 94%? Fiercer bidding. When non-SME competitors are eligible, every firm bids more aggressively—even when the same number ultimately participate.
Where It Hurts Most
13.7%
High-value items
vs
9.8%
Low-value items
The cost of restricting competition is 40% larger for high-value items—where the pool of capable non-SME suppliers is broadest. For specialized, low-value items, SME restrictions are less distortionary. Uniform rules are the wrong answer.
The Full Picture: Quantile DiD
−62%
Standardized items (τ = 0.10)
→
+45%
Specialized items (τ = 0.90)
At the bottom of the price distribution—standardized items with many capable suppliers—open competition slashes prices by 62%. At the top—specialized items with thin markets—open tenders actually raise prices by 45%, possibly through adverse selection. The policy lesson: target the exemption.
The One Clear Benefit
5–11 km
Winners located closer to buyers
SME-only tenders do one thing well: they promote local sourcing. Winning firms are 5 to 11 kilometers closer to public buyers under the restriction. But is geographic proximity worth a 7–13% price premium?
The Bill
R$50–85M
One product group 18 months
~R$310M
All groups (extrapolation)
For medical supplies alone: R$50 million in real terms, R$85 million nominal. Extrapolating to all product groups—an assumption that the heterogeneity results suggest may not hold—yields roughly R$310 million. An order of magnitude, not a point estimate.
What We Acknowledge
✗ Only one product group switches—permutation p = 0.317.
✗ Placebo tests fail for firms and bids (pre-trends).
✓ Four-outcome consistency: a single shock can’t produce all effects.
✓ Policy change driven by legal reinterpretation, not outcomes.
The Reform That Writes Itself
Differentiate
Exempt high-value standardized items from SME-only rules. Keep preferences for specialized items where they’re less distortionary.
Reduce opt-out costs
Let PBUs default to open tenders above a value threshold—without audit court approval. Brazil’s Lei 14.133/2021 creates the opening.
Not abolish SME preferences. Target them. The savings are concentrated where competition matters most. The benefits survive where markets are thin.
“Governments restrict public tenders to small firms, yet the fiscal cost is unknown. Now we know: 7 to 13 percent—and most of it comes not from fewer bidders, but from weaker bidding.”
Darcio Genicolo-Martins
INSPER • São Paulo, Brazil • 2026
Protecting small firms is a worthy goal. But the instrument matters as much as the intention.