Affirmative Action Exemptions and Capacity Constrained Firms

This paper studies how affirmative action exemptions in public procurement can improve efficiency and government expenditures without harming disadvantaged business enterprise (DBE) utilization, particularly when DBEs are subject to capacity constraints. I examine a unique program employed by the Iowa Department of Transportation, where prior to 2013 prime contractors were allowed an exemption from a project’s affirmative action requirement if their history of DBE utilization was sufficiently high. I find that DBE subcontractors face capacity constraints, and prime contractors use the exemption to smooth demands on DBE capacity. The exemption policy was unexpectedly eliminated in 2013, which I exploit to evaluate its effect on DBE utilization and procurement costs. I find that average DBE utilization was unchanged and bids rose on affirmative action contracts. ∗University of California, Santa Cruz. [email protected]. I appreciate the comments of Natalia Lazzati and Francesco Decarolis.