Sustainable public procurement and firm dynamics: Evidence from Spanish contracts

Securing a government contract is commonly seen as a driver of firms’ growth. In recent years, the practice of considering sustainable award criteria (SAC) to select the winning firm in public auctions has gained popularity. However, the role it plays in shaping the selection process, influencing the decisions of winning firms, and ultimately affecting their growth remains unclear. This paper combines data from public procurement contracts with firm data from Spain to examine how firms winning SAC contracts evolve compared to those awarded standard contracts. We find that the use of SAC is associated with 7% lower employment and 11.4% lower sales relative to non-SAC contracts. This gap is concentrated among larger contracts and is particularly pronounced in the two most relevant sectors: health and social work and construction. We provide evidence consistent with a potential mechanism behind this pattern, driven by contracting authorities implementing SAC for the first time. As they gain experience with SAC, the undesired disruption for firms winning their contracts disappears. Less experienced authorities tend to assign higher weights to sustainability criteria and devote a larger share of the award-criteria description to them.