Do Public Sector Contracts And Policy Towards Small Firms Matter?: Evidence From Women Business Enterprises

Cadogan, Godfrey (1994): Do Public Sector Contracts And Policy Towards Small Firms Matter?: Evidence From Women Business Enterprises.

Abstract

This paper provides an empirical investigation of the agency relationship between the public sector and small firms targeted for assistance by examining micro and macro data for a cross section of eligible women business enterprises (WBEs). Using hedonic sales and employment indices we find that 2% of firm sales is lost to negative gender externality. We show that under asymmetric information public sector transfers neither compensate for this loss of sales nor do they increase employment. When we impose transfer restrictions under perfect information, sales is unaffected but firms respond by increasing the amount of part time employees hired and do not increase full time employment. Moreover, we show that WBE presence at the state level depend on prime-contractor-sub-contractor relationships and that if long term contracts are offered then business risks are reduced and firms increase employment levels because of securitized sales. Further, formation of new WBEs are directly proportional to the amount of new small business loans provided in the economy after controlling for size and population effects. The evidence suggests that after President Richard Nixon signed Executive Order 11625 the velocity of new WBE formation is approximately 39% of the difference between policy targets and actual realization. We introduce an entrepreneurial reaction function which shows that firms react to private and public sector funding incentives but not to the level of education attainment and overall business formation in the economy. We find that agency problems provide incentives for firms to engage in strategic misrepresentation. Thus, the incidence of adverse selection in current transfer programs are as high as 60% in some instances; imposes an asymmetric residual loss on the public sector, and contrary to the goals of benevolent policy, transfers are skewed in favor of less needy firms.

• Item Type: MPRA Paper
• Language: English
• Keywords: negative externalities, compensatory financial contracts, hedonic indices; business risk; entrepreneur reaction function
• Subjects: D - Microeconomics > D2 - Production and Organizations > D21 - Firm Behavior: Theory; L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L25 - Firm Performance: Size, Diversification, and Scope; D - Microeconomics > D6 - Welfare Economics > D63 - Equity, Justice, Inequality, and Other Normative Criteria and Measurement; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L10 - General; H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H23 - Externalities ; Redistributive Effects ; Environmental Taxes and Subsidies; J - Labor and Demographic Economics > J1 - Demographic Economics > J16 - Economics of Gender ; Non-labor Discrimination; J - Labor and Demographic Economics > J2 - Demand and Supply of Labor > J21 - Labor Force and Employment, Size, and Structure; G - Financial Economics > G1 - General Financial Markets > G18 - Government Policy and Regulation; L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L26 - Entrepreneurship; H - Public Economics > H8 - Miscellaneous Issues > H81 - Governmental Loans ; Loan Guarantees ; Credits ; Grants ; Bailouts; H - Public Economics > H7 - State and Local Government ; Intergovernmental Relations > H76 - State and Local Government: Other Expenditure Categories; L - Industrial Organization > L5 - Regulation and Industrial Policy > L53 - Enterprise Policy; D - Microeconomics > D4 - Market Structure, Pricing, and Design > D49 - Other; M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M2 - Business Economics > M21 - Business Economics

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