Report

Buy Big or Buy Small? Procurement Policies, Firms' Financing, and the Macroeconomy


Abstract: This paper examines the macroeconomic effects of public procurement. We exploit novel data to show that procurement eases firms’ borrowing constraints and has persistent effects on firm growth. Using a macroeconomic model with heterogeneous firms, asset- and earnings-based borrowing frictions, and government purchasing, we simulate revenue-neutral reforms that increase the share of small firms in procurement. We find that, despite helping financially constrained firms grow, these policies lead to non-trivial unintended negative effects. On net, the policies lead to a modest decline in GDP. The findings highlight how procurement design influences aggregate outcomes through firm-level financial frictions and reallocation dynamics.

JEL Classification: E22; E23; E62; G32;

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Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Staff Reports

Publication Date: 2022-02-01

Number: 1006

Note: Revised June 2025. Previous title: “Government Procurement and Access to Credit: Firm Dynamics and Aggregate Implications”