Effects of the award of public service contracts on the performance and payroll of winning firms

Abstract We investigate the effects of an exogenous demand shock arising from the award of public service contracts by Italian public administrations in 2015 on a sample of 1782 winning small and medium firms that were not awarded any contract during the previous 3 years. Using a difference-in-differences model with continuous treatments estimated on a propensity score matched sample, our results reveal that higher awarded values enhance various performance dimensions of the winning firms as well as their average payroll per employee. Nonetheless, higher winning rebates moderate the positive effects of the award on payroll by inducing the winning firms to downward manage both salaries and social security contributions per employee to maintain their desired level of performance. The effects are mostly significant for smaller microenterprises. In addition, winning rebates negatively affect the performance of firms in the construction industry by leading these firms to downward manage the payroll of their employees more aggressively than firms in other industries. Our findings provide novel insights for the implementation of industrial policies aimed at achieving sustainable macroeconomic and social goals, within the business fabric, through the effective management of public service procurement.