Examining Equity–Efficiency Trade-offs in Set-Aside Contracting: Evidence from Natural Experiment

• In Event: Social Equity and Economic Policies

Abstract

While government contracting primarily aims to achieve market efficiency, governments also commonly use contracting to pursue broader societal goals. For example, governments worldwide have adopted set-aside contracts to ensure equal and open opportunities for disadvantaged firms or organizations to access government markets. Although empirical evidence suggests that equity-based contracting practices can improve access for disadvantaged firms, few studies examine whether such equity gains come at the cost of efficiency or contracting performance. Specifically, concerns persist that prioritizing disadvantaged firms in the contracting process may prevent more capable non-disadvantaged firms from securing contracts. This paper uses a natural experiment in Taiwan to examine whether set-aside contracts achieve equity goals at the expense of efficiency or contract performance. The paper takes advantage of a unique policy situation in Taiwan, which requires that all government contracts below NT$1.5 million ($50,000 USD) in certain categories must give priority to sheltered workshops and organizations serving people with disabilities, while contracts above this amount do not. This arbitrary threshold allows us to compare very similar contracts that are treated differently solely based on whether they fall just above or below NT$1.5 million. The policy applies to specific categories, including food items, handicrafts, cleaning agents and services, assistive devices, publications, catering, and transportation/logistics. This study employs a difference-in-discontinuity design that combines the regression discontinuity design (RDD) with the difference-in-differences (DID) methodology. This paper compares contracts just below the NT$1.5 million threshold with those just above it, both within the defined categories and outside the government-required categories. This approach enables this paper to estimate the causal impacts of set-aside contracts. The findings imply that set-aside contracts can improve equity without sacrificing efficiency. Findings show that the set-aside requirement increased the number of disabled bidders by 20%, but the number of non-disabled bidders participating in the bidding process did not decrease, indicating that set-aside requirements do not deter capable firms from participating. In addition, while the set-aside contract increased the probability of disabled bidders winning contracts by 60%, there is no significant difference in final contract prices between contracts subject to set-aside requirements and those that are not, meaning the government does not pay premiums when awarding contracts to disabled firms. Overall, these preliminary findings suggest no equity-efficiency trade-off in set-aside contracting. This paper will further incorporate contract monitoring data to examine whether set-aside contracts are more likely to experience significant delays or delivery failures.

Author

• Yung-Yu Tsai, National Chengchi University
  Presenting Author