Public procurement accounts for one third of government spending. In this paper, the author documents a new mechanism through which government procurement promotes firm growth: firms use procurement contracts to increase the amount of cash-flow based lending.
The paper uses Portuguese administrative data over 2009-2019 and exploit public contests as a source of quasi-exogenous variation in the award of procurement contracts. Winning an additional €1 from a procurement contract increases firm credit by €0.05 at lower interest rates. This finding highlights a mechanism through which future fiscal stimulus can impact the real economy today: procurement contracts increase firms’ net worth by increasing future cash-flows that can be used as collateral to ease borrowing constraints and boost corporate liquidity.
Consequently, this enhanced access to credit promotes higher investment and employment with these effects being more pronounced and persistent in smaller and financially constrained firms. At the aggregate level, the author empirically estimates that an additional €1 in public procurement increases regional output by €1.8 with the credit channel accounting for 10% of it.
