Public Demand Allocation and Productivity of the Private Sector

We study how variation in the allocation mechanism of public demand shapes firm performance and aggregate productivity. Exploiting the quasi-random implementation of an efficient or lottery-like auction format in the Italian construction sector, we find that when the same amount of public resources is allocated through the efficient mechanism, recipient firms experience about 8% higher revenue growth within three years. The effect is strongest where contracting authorities exhibit greater screening capacity and in less competitive markets. Efficient allocation targets more productive firms, which subsequently secure a larger amount of future public resources. Simulations suggest that replacing lottery-like mechanisms with efficient ones could raise sectoral productivity by about 4%.