Wednesday, May 9, 2012

New Article: Link between Demographic Representation and Federal Contracting Decisions

Recently (May 6), a fascinating new privatization article appeared on SSRN - The Link between Demographic Representation and Federal Contracting Decisions, by Professors Deanna Malatesta (Purdue University Indianapolis), Sergio Fernandez (Indiana University Bloomington), and Craig Smith (University of Arizona).  This important article is forthcoming in the Public Administration Review.

Here is the abstract:     
Relying on the traditional claims associated with the theory of representative bureaucracy, this study examines whether the racial and gender characteristics of contracting officers and other public agency personnel affect decisions to award contracts to members of socially and economically disadvantaged groups. The expectation under the theory is that decision makers are inclined to provide substantive benefits to the groups to which they belong. Our seemingly related regression (SUR) models provide evidence that is consistent with the theory for racial minorities but not for women. In fact, more women in agency senior positions are associated with fewer contract dollars awarded to women-owned small businesses. This finding offers preliminary evidence that implicit biases against women may be more intractable than biases against racial minorities. Results of our analyses have important implications for the effectiveness of the Small Disadvantaged Business (SDB) program and the Women-Owned Small Business (WOSB) program, both of which are intended to address the significant historical underrepresentation of racial minorities and women in government procurement. We believe a main contribution of the research stems from the introduction of plausible explanations for our findings from social psychology that should be useful for future research on representative bureaucracy.

This is an important side of government outsourcing and privatization - at least on the federal level (and I think in many states), privatization and contracting out involves not only cost-saving conserations, but other policy objectives as well - like providing a boost to minority-owned or women-owned businesses (the latter contributes to the commonplace anecdotes about entrepreneurs listing their marginally-involved wives as the "owner"on the business in order to be eligible for lucrative government contracts.  Before turning to the findings in this new article, I must point out a more preliminary observation: the federal government has long recognized that government contracts are a significant boost to the private firms that obtain them, helping them expand operations, cultivate credit, and capture greater market share.  This recognition is the entire basis for the federal laws requiring that firms owned by womena and minorities get favorable treatment in the selection process.  Yet the same recogniztion disappears when politicians are talking about privatization and outsourcing in general - then, suddenly it's all about what the firms can do for the taxpayers, supposedly saving boatloads of money for the public fisc.  They omit how beneficial the contracts are for the firms that obtain them, how such contracts can distort the market and provide ancillary (and unfair) advantages for the firms that get the contracts. The fact that favoring minorities and women in government contracts helps these groups implies that government contracts in general provide intangible (and sometimes quite tangible) subsidies for the private firms - which brings into question whether the taxpayers are really getting the best deal they could.  My point is that outsourcing is not all about saving money for the taxpayers - it's also about the benefits to the contractors.  But they don't discount their rates to the taxpayer to offset this benefit.  If they were required to do this (that is, required to give the taxpayer the best possible deal, which is what the private sector would demand), then most would no longer be interested in the government contract.

Now, about the findings here: very signficant contribution to the literature.  Their first observation - that the government officials tend to favor contractors from the same ethnic group - is, in my view, the more significant.  The conclusion that bias against women is super-strong - based on the fact that  even female officials fail to favor women-owned businesses - is, well, one of many conclusions that one could draw from that fact.  The evidence that government outsourcing and privatization - which is becoming ubiquitous - involves a measurable amount of favoritism and self-interest by the officials selecting contracts - that's rather alarming.  And undermines the idea that taxpayer savings really control these decisions.

 - Dru Stevenson

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