AFFIRMATIVE ACTION AND THE UTILIZATION OF MINORITY‐ AND WOMEN‐OWNED BUSINESSES IN HIGHWAY PROCUREMENT

I. INTRODUCTION Affirmative action programs in public procurement are among the more important government programs intended to advance self-employment opportunities for minorities and women. In 2002, 6.75% of federal procurement dollars were awarded to disadvantaged business enterprises (DBEs) through the Small Business Administration, and preferential treatment for minority firms is a common feature of many state and local government agencies. Recent court decisions and state measures have reduced the scope of, and in some settings eliminated, affirmative action programs based on race or gender, which has given renewed importance to understanding the role of affirmative action in the success of self-employed minorities and women. The use of affirmative action is particularly widespread in the highway procurement industry. Since the late 1970s and early 1980s, most states have employed affirmative action to award contracts to minority-owned firms, and since 1982, the Federal Highway Administration (FHWA) has required states use affirmative action in awarding projects using federal funds. In 1998, states awarded $14.6 billion of construction and repair contracts using federal funds, of which $1.9 billion was awarded to firms owned by minorities and women. As Blanchflower and Wainright (2005) note, in the intervening years states have increasingly been able to use race-neutral measures to meet goals, which has had an adverse effect on utilization of minority-owned firms. Understanding the effects of affirmative action in this industry is made important by the significance of the public sector. According to the 2002 census of industries, 72.6% of the revenue earned by firms in the highway, street, and bridge construction industry was from government-owned projects. As a result, changes in public procurement policy will have a strong effect on firms in the highway construction industry. Despite the importance of affirmative action in this industry, our understanding of the effects of these programs is limited. States generally use percentage goals for the participation of minority-owned subcontractors by prime contractors. Past research has established the response of DBE utilization to large episodic changes in affirmative action, such as the elimination by certain states or cities of affirmative action programs (Blanchflower and Wainright, 2005). However, little evidence exists regarding the intensive margin of affirmative action in public procurement. That is, as participation goals are raised or lowered, what is the response of the utilization of DBEs generally, and minority- and women-owned firms specifically? Higher DBE goals do not necessarily raise the utilization of firms owned by minorities and women for two reasons. First, the DBE goal may not be binding, in which case the marginal effect of small changes to the goal would be zero. Second, goals for the utilization of DBEs are often not perfectly enforced. For instance, a contractor facing a requirement to subcontract a fraction of a contract to DBEs can skirt this requirement by documenting a "good faith effort" to employ firms owned by minorities and women. The goal of this paper is to provide new evidence regarding the effectiveness of affirmative action programs in highway procurement at increasing purchases from firms owned by minorities and women. Two sources of variation are employed to answer this question. The first is variation in DBE goals across states over time, and the second is variation across projects within a state. I begin by examining state level data regarding affirmative action goals and DBE utilization over the entire history of the FHWA's affirmative action program. I utilize changes in affirmative action goals over time within states to identify the effect of affirmative action intensity on the level of DBE purchases. I find that increasing goals for the utilization of DBE goals substantially raise the utilization of minority-owned business enterprises (MBEs). …