Robert Elder (Beloit College)
Given the constraints that limit the implementation of discretionary monetary or fiscal policies to increase aggregate demand nowadays, policymakers must look for other options if they wish to induce expansion. This paper explores EU procurement procedures as a possible venue for transforming a given amount of government purchases into a greater amount of aggregate demand. Current EU rules call for public contracts to be awarded to the lowest price bid or to “the most economically advantageous tender.” If the range of “economically advantageous” proposals were broadened to include contractors who identify private sector investment projects that are strategic complements with the public works projects upon which they bid, then such firms would undertake additional investment expenditures as a best response to winning a government contract, which itself involves government spending. Adhering strictly to the definition of strategic complementarity, firms would have to make the case that such new investment expenditures would equal zero if the firm’s bid for the government contract is rejected; this would assure that the additional investment undertaken in the event of an accepted bid is not gratuitous. In sum, by encouraging the search for strategic complementarities, procurement policy could endogenize investment expenditures as a positive function of government purchases, and aggregate demand could be made larger while governments simultaneously maintain a given level of fiscal discipline.