Collaborative Research: DCL: HBCU EAGER Network effects, competition and survival of small and minority owned firms in public procurement

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Award Abstract Alexander/KosmopoulousCollaborative Research: HBCU DCL, EARGER: Network Effects, Competition and Survival of Small Minority-Owned Firms in Public ProcurementSmall firms, especially those owned by economically disadvantaged groups, provide a large share of employment for this population. These companies are often at competitive disadvantage when they compete against large firms and often lose in the process. Can these firms form networks to learn from each other, increase their efficiency, compete effectively against larger firms and expand their activities? How do these networks affect the chance of winning a bid and effectively carrying out the project? This research project will use data from the state of Oklahoma road construction bidding program to study the impact of networks on efficiency of small minority-owned businesses. The study will focus on factors that increase the chances of forming networks and the effects of these networks on firm success in bidding, cost efficiency, profits, and long-term stability. The results of this research project will increase our understanding what determines the success of small minority-owned firms and in the process, provide policy guidance on how best to increase the competitiveness of small firms generally. Because the results of this research project could guide policies to increase the efficiency of small firms, the results could also increase the competitiveness of the U.S. economy. This collaborative research will study the industrial organization and competitiveness of small minority-owned firms. Specifically, it will use administrative and field data to study the effects of network formation on the success and survival of small, minority-owned firms in bidding for and completion of government infrastructural contracts. The research focuses on: (i) strategic network formation among contractors who repeatedly compete or cooperate in contracting jobs; (ii) the impacts of networks on the probability of a small minority-owned firm winning a bid for contract; (iii) the effects of networks on the survival of small firms. The state of Oklahoma construction bidding data has enough detailed information to allow the PIs to identify networks, control for heterogeneity of firms and ownership structure when analyzing the effects of networks on efficiency. The PIs will develop an auctions model that allows for information asymmetries across different types of firms due to differences in experience, efficiency and network connections. The model treats network formation as endogenously determined by firm net profitability in a network relative to profitability outside a network. The PIs will use Bayesian methods to estimate the models. The results of this research project will inform our understanding of the relationship between network formation and efficiency of small minority-owned firms and in the process, contribute to the competitiveness of the U.S. economy.