Making use of a unique government procurement scheme–true random lotteries–for short-term, medium-skilled, large-budget service contracts in the Dominican Republic (DR), we provide new evidence on the role of demand-side shocks in generating positive firm development and individual labor market shifts. These one-time lottery contracts, typically for school and road construction projects with budgets above USD$500,000, test whether demand shocks allow firms and individuals to overcome market imperfections and realize measurable productivity and firm growth. We aim to collect detailed firm data through a mix of administrative tax records and a small survey to understand how our effects are explained by various potential mechanisms, including technological upgrading within the firm and reduced reputation frictions. Governments around the world, who have a clear role in maintaining and improving infrastructure, would benefit greatly from knowing the private-sector externalities of their procurement activities. With the policymaker’s problem in mind, we seek to augment our primary research question by studying the actual implementation of these procurement contracts. This will inform policymakers which firms benefit the most from public procurement contracts, and which firms deliver the highest quality, allowing improved targeting and potentially other contracting types in the future.
The main results are that experience in a managerial role leads individuals to create new, expanding firms and that providing this experience widely has important implications for labor markets. To establish these results, the project team proceeds in four steps. First, they document that contract lottery winners are more likely to become entrepreneurs in the long – term. The treated population shifts into firm creation and firm ownership five years later; winners are 7.7 percentage points or 22% more likely to have ever started a firm and start .15 new firms more than those who were not offered a contract. This effect is matched by a similar shift out of wage work. Specifically, lottery winners are 12 percentage points less likely to be formal, wage – earning employees. The newly created firms are predominantly in the same sector, construction, but lottery winners also start more firms of other types than non – winners. Additionally, lottery winners see substantial increases in net income that decay, but stay positive up to five years later.
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