| Government purchases of goods and services represent approximately 10 percent of the U.S. economy, and policy is commonly used to direct some of those purchases toward specific groups. Bid preferences in procurement auctions, which allow firms from an identifiable group an advantage in bidding against unfavored firms, and subcontractor participation goals that require participation of minority and women owned subcontractors, are two tools commonly used to achieve a particular allocation.;The first chapter of this dissertation considers the effects of bid preferences. While efficiency is expected to be lower due to bid preferences, procurement costs may actually decrease depending on the competitive response of firms. Using data from California auctions for road construction contracts, where small businesses receive a five percent bid preference in auctions for state funded projects, I show that procurement costs are 3.5 percent higher in auctions using preferences. This cannot be explained by the bidding behavior of firms. Large firms bid 1.4 percent lower on auctions using bid preferences, while the lowest cost small firms increase their bid on preference auctions by 1.4 percent. The bid preference effect is instead attributed to reduced participation by lower cost large firms.;Structural estimates of latent firm costs are then used to evaluate how is impacted by the use of preferences. The efficiency loss associated with changing some auction winners from large firms to small firms is estimated to represent 0.7 percent of overall procurement costs; however, including the adverse effect of preferences on the participation of large firms increases the estimated efficiency loss to 6.5 percent.;The second chapter uses California's Proposition 209, which prohibited the consideration of race or gender in state-funded contracts, to investigate the effects of disadvantaged business enterprise subcontractor participation goals. After Proposition 209, the winning bid on state funded highway contracts fell by 4–6 percent relative to federally funded projects, for which preferences still applied. The savings are not explained by compositional changes in bid winners or changes in the number and quality of bidders. The subcontractor goals are found to distort the contractor's make-versus-buy decision, which may explain some of the decline. |
