The Credit Channel of Public Procurement

78 Pages Posted: 21 Nov 2022

See all articles by Ricardo Duque Gabriel

Ricardo Duque Gabriel

Board of Governors of the Federal Reserve System; National Bureau of Economic Research (NBER)

Date Written: November 2022

Abstract

Public procurement accounts for one third of government spending. In this paper, I document a new mechanism through which government procurement promotes firm growth: firms use procurement contracts to increase the amount of cash-flow based lending. I use Portuguese administrative data over 2009-2019 and exploit public contests as a source of quasi-exogenous variation in the award of procurement contracts. Winning an additional €1 from a procurement contract increases firm credit by €0.05 at lower interest rates. This finding highlights a mechanism through which future fiscal stimulus can impact the real economy today: procurement contracts increase firms’ net worth by increasing future cash-flows that can be used as collateral to ease borrowing constraints and boost corporate liquidity. Consequently, this enhanced access to credit promotes higher investment and employment with these effects being more pronounced and persistent in smaller and financially constrained firms. At the aggregate level, I empirically estimate that an additional €1 in public procurement increases regional output by €1.8 with the credit channel accounting for 10% of it.

Keywords: Credit, Collateral, Corporate Finance, Fiscal Policy, Public Procurement

JEL Classification: E62, G38, H32, H57, H81

Suggested Citation

Gabriel, Ricardo Duque, The Credit Channel of Public Procurement (November 2022). Available at SSRN: https://ssrn.com/abstract=4270202 or http://dx.doi.org/10.2139/ssrn.4270202

Ricardo Duque Gabriel (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

HOME PAGE: http://www.ricardoduquegabriel.com/

National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
United States

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