Do Public Sector Contracts And Policy Towards Small Firms Matter?: Evidence From Women Business Enterprises

This paper provides an empirical investigation of the agency relationship between the public sector and small firms targeted for assistance by examining micro and macro data for a cross section of eligible women business enterprises (WBEs). Using hedonic sales and employment indices we find that 2% of firm sales is lost to negative gender externality. We show that under asymmetric information public sector transfers neither compensate for this loss of sales nor do they increase employment. When we impose transfer restrictions under perfect information, sales is unaffected but firms respond by increasing the amount of part time employees hired and do not increase full time employment. Moreover, we show that WBE presence at the state level depend on prime-contractor-sub-contractor relationships and that if long term contracts are offered then business risks are reduced and firms increase employment levels because of securitized sales. Further, formation of new WBEs are directly proportional to the amount of new small business loans provided in the economy after controlling for size and population effects. The evidence suggests that after President Richard Nixon signed Executive Order 11625 the velocity of new WBE formation is approximately 39% of the difference between policy targets and actual realization. We introduce an entrepreneurial reaction function which shows that firms react to private and public sector funding incentives but not to the level of education attainment and overall business formation in the economy. We find that agency problems provide incentives for firms to engage in strategic misrepresentation. Thus, the incidence of adverse selection in current transfer programs are as high as 60% in some instances; imposes an asymmetric residual loss on the public sector, and contrary to the goals of benevolent policy, transfers are skewed in favor of less needy firms.