Competition under Financial Constraints in Procurement Markets

Abstract

Financial constraints raise firms' effective costs, often asymmetrically, with consequences for competition and market structure. We study these effects in public procurement, where payment delays force suppliers to finance the gap between production and payment. We combine administrative data on the full contract life-cycle with a reform that sharply reduced payment delays in Chilean public health procurement. Difference-in-differences estimates show that shorter delays increase auction participation --especially among small firms-- and lower winning bids by 3 percent. To separate financing costs from competition effects, we estimate a model of entry and bidding in scoring auctions in which delays act as a contract-specific cost wedge. We recover a monthly cost of liquidity of 0.7 percent (9 percent annualized), higher for small firms. Financing costs account for roughly 12 percent of the small–large cost gap, implying payment terms are a policy lever over cost asymmetries and competition.