Seminar in Microeconomics - Otto Toivanen (Aalto University School of Business)

30 years after the establishment of the European single market, only a fraction of public procurement is traded across borders. We estimate gravity equations for regular and public procurement trade separately for goods and services distinguishing between border, distance and language effects. We perform counterfactuals based on Eaton and Kortum (2002) investigating the importance of geography- and communications-related trade costs. Public procurement trade in goods would increase 11- and in services 2.5-fold if the border effect for public procurement was the same as for regular trade. Public procurement goods output would increase by 15 and services output by 1.6%. Using English language procurement documents in all Member States would increase trade in goods by 18 and in services by 34% with output increasing by 0.1%. Heterogeneity across countries is substantial.