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Regular version of the site

Working paper

Set-Asides: The Not-So-Clear Side of Public Procurement

Shadrina E. V., Dmitry V. Kashin, Dmitri V. Vinogradov.
Set aside procedures in public procurement are those reserved for a sub-class of bidders, such as small and medium enterprises (SMEs) only, as a tool of the preferential treatment of SMEs by many governments. Prior studies and our results indicate these setasides reduce costs of government contracting. If they are cheaper, why should regulations enforce them, and why do so on a limited scale? Using the public database of procurement procedures in the Russian Federation, we first show that SME-focused set-aside procedures indeed attract a larger number of participants and result in a larger rebate for contracting authorities (CA), however the vast majority of CAs strictly prefer non set-aside procedures: the share of set-asides is significantly below the threshold dictated by the Russian regulation. We then turn to factors that make CAs avoid set-asides – these are regional, CA-specific and contract-specific – and relate them to uncertainty and asymmetric information problems, which may be elevated in set-asides and thus counteract the cost-reduction argument. Our findings suggest results on economic benefits of set-aside procedures should be taken with a pinch of salt, and more attention should be paid to perceived risks of procurement from SMEs.