| In public-sector procurement, governments frequently offer programs that give preferential treatment to certain groups of firms. My dissertation examines how these programs affect procurement outcomes. I study two types of preference programs: subcontracting requirements, where the government requires that a particular percentage share of a contract be completed by preferred subcontractors, and bid discounts, where the government lowers the bids of preferred firms for comparison purposes and pays the full price to the firm with the lowest bid. My dissertation has two chapters.;My first chapter addresses subcontracting requirements applied under New Mexico's Disadvantaged Business Enterprise Program. This program uses subcontracting requirements to support firms considered disadvantaged in federal procurement, which are small firms owned and controlled by minorities or women. Theoretically, I find that subcontracting requirements need not substantially increase the final cost of procurement, even when preferred firms are relatively more costly. The intuition behind this result is that, by restricting the pool of subcontractors, firms know more about their competitors' costs, which causes firms to reduce their markups. Using an empirical version of the theoretical model estimated on New Mexico's federal procurement data, I find that subcontracting requirements only increased procurement costs by 0.3 percent yet led to a 12.7 percent increase in the amount of money awarded to preferred subcontractors.;My second chapter investigates bid discounts awarded to resident firms under New Mexico's Resident Preference Program. Unlike other papers in the bid discounting literature, my methodology accounts for potentially affiliated project costs -- which is likely to arise in these procurement settings since firms typically share subcontractors and suppliers. Using an empirical auction model estimated on data from New Mexico's Resident Preference Program, I find that offering preference to resident bidders led to a 1.2 percent increase in procurement costs; however, procurement costs are 2.9 percent higher than would be predicted if the model did not account for project-cost affiliation. This chapter highlights the importance of accounting for affiliation in the evaluation of bid preference programs. |
