be biased towards locally produced goods (Morey (2016)) or consumers’ identities, which may be expressed by consuming local varieties (Atkin, Colson-Sihra, and Shayo (2021)). A second possibility is that regional and national governments maximize their respective citizens’ welfare and use public procurement to manipulate the terms of trade. In that respect, our paper is related to the vast literature that analyzes optimal trade policy (Limao, 2008). A third possibility is that governments’ home bias is simply driven by “politics”. Applying the Grossman and Helpman (1994)’s theory to the context of public procurement, it could be that the presence of locally based lobbies biases governments’ choices towards local firms, even if that is not in the interest of local consumers. Along these lines, recent work shows that firms with political connections are more likely to win grants and procurement contracts (Choi, Penciakova, and Saffie (2022) in the case US and Baltrunaite (2020) in the case of Lithuania).

**Trade in services.** The richness of our data enables us to observe trade in procurement services, allowing us to contribute to an active literature on the tradability of services (Mu ̃noz (2021), Dingel, Gottlieb, Lozinski, and Mourot (2022)). Procurement services account for one third of procurement contracts in our data (and up to two thirds if we count construction as a service). Using our granular establishment-level data, we find that the gravity equation derived from a standard theoretical framework provides as good a fit for services as for goods, confirming its suitability to study trade in services.

**Government decentralization and economic outcomes.** Finally, and more tangentially, our paper contributes to the debate about the optimal degree of government decentralization (e.g., Oates (1985), Besley and Coate (2003), Treisman (2007), Tricaud (2021)). Our results present a new channel through which descentralization affects economic outcomes. In particular, our results suggest that a higher share of government expenditure accounted for by subnational governments will be associated to a higher segmentation of economic activity both within and across countries within the EU.

The rest of the paper is organized as follows. In section 3, we explain how we built our dataset and present some summary statistics. In section 4, we present some novel stylized facts that motivate using a canonical model of trade with heterogenous agents for our analysis. In section 5, we present our model. In section 6, we explain our strategy to estimate the governments’ home bias. In section 7, we analyse potential concerns and limitations of our empirical findings and explore different mechanisms behind them. In section 8, we explain how we calibrate the rest of the parameters of the model. In section 9, we use the calibrated model to quantify the role of the governments’ home bias in the integration of procurement markets. Finally, in section 10, we conclude.

# **3 Micro Data on Procurement Flows**

We use publicly available data from Opentender, a procurement platform funded by a European Union Horizon 2020 project devoted to increasing the transparency of the procurement sector in Europe. The Opentender dataset consists of merging data from different national sources and 8