Opportunities and Entrepreneurship: Evidence on Advanced Labor Market Experience

Policy Context

Public procurement is a critically important government activity, often making up a large share of the government budget. These government contracts have the potential to engage productivity growth in small and medium enterprises (SMEs), constituting up to 60% of total employment in low- and middle-income countries (LMICs). Yet, many LMIC governments struggle to allocate spending transparently and free from corruption or high barriers to entry. In this study, researchers explore the effects of procurement for the firm and how governments should engage in procurement practices.

To do so, they analyze procurement activities in the Dominican Republic, heavily exploiting government-offered true random lotteries for short-term, medium-skilled, large-budget work contracts (USD$800,000) to answer two central questions: (1) What is the role of public sector demand in increasing individual and SME productivity? (2) What are the benefits and costs of providing government contracts randomly as compared to formal bidding processes or other contracting choices?

Study Design

Making use of a unique government procurement scheme—true random lotteries—for short-term, medium-skilled, large-budget service contracts in the Dominican Republic, researchers 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 (called soteros), typically for school and road construction projects with budgets above USD$500,000, test whether an influx of jobs (demand shock) allow firms and individuals to realize measurable productivity and firm growth. Researchers, in turn, collect detailed firm data through a mix of administrative tax records and a small survey to understand how effects are explained by various potential mechanisms, including technological upgrading within the firm and reduced reputation frictions. They also compare the randomized sorteo hiring directly to other procurement schemes or construct other counterfactual (“dummy”) hiring procedures to understand the trade-offs in government hiring.

Results and Policy Lessons

Results suggest 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.

Governments around the world, who have a clear role in maintaining and improving infrastructure, would benefit greatly from knowing the impacts on the private-sector (externalities) of their procurement activities. With the policymaker’s problem in mind, researchers 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.