||**All **|**frms**|> **Med**|**ian leverage**|
|---|---|---|---|---|
||(1)|(2)|(3)|(4)|
|∆_pityit_/_kit_|0.208<sup>_a_</sup>|0.211<sup>_a_</sup>|0.303<sup>_a_</sup>|0.292<sup>_a_</sup>|
||(0.001)|(0.001)|(0.001)<br>|(0.001)<br>|
|∆_pigtyigt_/_kit_|0.182<sup>_a_</sup>|0.161<sup>_a_</sup>|0.229<sup>_b_</sup>|0.191<sup>_b_</sup>|
||(0.055)|(0.052)|(0.100)|(0.089)|
|Observations|61,445|62,442|29,528|30,037|
|R-squared|0.238|0.084|0.296|0.118|
|Sector×year FE|Yes|Yes|Yes|Yes|
|Firm FE|Yes|No|Yes|No|

**Notes:** This table presents results from estimating the relationship between the change in firm’s leverage and the change in its average product of capital and change in its earnings coming from selling to the government divided by the firm’s total stock of capital. Regression (16) is estimated with firms obtaining at least one procurement project over 2000-13 using annual data. Standard errors are clustered at the firm level;<sup>_a_</sup> indicates significance at the 1% level,<sup>_b_</sup> at the 5% level, and<sup>_c_</sup> at the 10% level.

## **Table 2.** Change in Leverage and Procurement

_β_ 2 = 0 _._ 191. For the model to generate these regression coefficients and a credit-to-capital ratio of 0.55 we need _φp_ = 0 _._ 10, _φg_ = 0 _._ 15, and _φa_ = 0 _._ 64. Hence, firms can pledge 10% of their annual earnings from selling to the private sector, 15% of their annual earnings from selling to the government, and 64% of their capital stock. Using equation (10), these numbers translate into _φp_ = 0 _._ 27, _φg_ = 0 _._ 41, and _φa_ = 2 _._ 81, which mean that firms can increase their capital by 27% of their annual earnings in the private sector and by 41% of their annual earnings from selling to the government.<sup>22</sup> This is the result of a multiplier effect: firms can borrow against their revenues, allowing them to buy more capital, which can be partly collateralized to obtain further credit. This is an important interaction and captures how earnings-based constraints affect a firm’s ability to grow also depends on the value of _φa_ .

# **5.3 Block #3: participation and size of procurement**

There are four parameters driving the size and composition of procurement: _Yg_ , _mg_ , _η_ 0, and _η_ 1. The parameters _Yg_ and _mg_ are policy parameters governing the relative size of procurement in the economy and the fraction of goods bought by the government. To capture the size of procurement in the aggregate economy, we set _Yg_ to match the share of procurement in GDP equal to 12.1%, which is the value we measure in the Spanish national accounts in the year 2006. To capture the number of firms that sell to the government, we proceed as follows. In our micro data, when looking across all sectors, only 0.5% percent of firms participate in procurement in a given year. However, whereas our balance sheet and income statement data covers the quasi-universe of Spanish companies, our procurement data only captures around 13% of the total procurement value measured in national

> 22We note that both _φp_ and _φg_ satisfy Assumption 1, which means that capital cannot be self-financed through the earnings-based constraints, see Lemma 2 in Appendix D.

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