Government Purchases and Firm Growth
32 Pages Posted: 16 Apr 2021 Last revised: 2 May 2021
Date Written: April 1, 2021
Public procurement accounts for a substantial portion of taxpayers' money and firms' revenue. To prove a causal relationship between government purchases and firm growth, I exploit an auction mechanism in Korea where contracts are randomly allocated. I find that a short-term contract induces long-term changes in the winning firm's growth, especially among small, young, and financially constrained firms. I also show that these firms grow their private operations. I explore three plausible mechanisms behind the persistent growth: (i) building reputation in private markets, (ii) overcoming financial constraints, and (iii) making irreversible investments. The data support the first two mechanisms.
Keywords: government purchases, firm growth, markup, financial constraints
JEL Classification: D24, O12, O23
Suggested Citation: Suggested Citation