Internal economies of scale in small firms: evidence from set-aside programs in random-ending public procurement auctions

Advisor: Lucas Lima

This study investigates the presence of internal economies of scale among small firms participating in Brazilian government procurement auctions. The analysis focuses on paired set-aside auctions with random ending times, which allocate procurement volumes between a non-exclusive auction and an exclusive auction for small firms. Using multiple Regression Discontinuity Designs (RDDs), the study examines how firms' bidding behavior in the second auction to end is influenced by their outcome in the first auction. The methodology takes advantage of the randomized nature of auction endings to isolate causal effects and compare changes in normalized bids between winning and losing firms. The results reveal that firms bid more aggressively after winning the first auction, indicating a decrease in average costs associated with larger expected production volumes. These findings demonstrate the existence of internal economies of scale in small firms, providing insights for the design of more efficient auction mechanisms. By considering internal economies of scale, policymakers can improve procurement strategies, potentially achieving significant government cost savings.