Research projects

A remarkable feature of government’ purchases is the fact that they are much more locally concentrated, both across countries and across regions within countries, than purchases by private firms and households. In the year 2010, for instance, less than 5% of the value of procurement contracts were awarded to foreign firms in countries like Italy, France, Spain, Portugal, or the UK.1 In the Spanish region of Catalonia, for example, around 70% of the value of procurement contracts was awarded to firms located within that region.

We isolate the governments’ role in explaining these border effects by applying a novel strategy that relies on observing the same establishment selling to several destinations and different government types within a destination. We find that governments’ home-bias explains a big fraction of the observed border effects.

Our results show that sub-national governments drive a large part of this effect: setting the estimated sub-national governments’ home bias to their national governments’ counterparts would decrease the total border effect by 29.5%. Both the intensive margin of home bias, i.e., awarding less value to participating non-local firms, and the extensive margin, i.e., higher entry barriers for non-local firms, are quantitatively important in accounting for the observed border effects.

Our results point towards the existence of big inefficiencies in the allocation of government procurement expenditure across firms, regions, and countries within the European Union.