Economic Analysis of Set-Asides in Public Procurement: Advancing Human Rights Goals

Economic Analysis of Set-Asides in Public Procurement: Advancing Human Rights Goals | Research Square window.SnipcartSettings = { analytics: { enabled: false } }; (function() { var accessVector = localStorage.getItem('access_vector') || ''; window.dataLayer = window.dataLayer || []; if (accessVector) { window.dataLayer.push({ user: { profile: { profileInfo: { snid: accessVector } } } }); } })(); (function(w,d,s,l,i){w[l]=w[l]||[];w[l].push({'gtm.start':new Date().getTime(),event:'gtm.js'});var f=d.getElementsByTagName(s)[0],j=d.createElement(s),dl=l!='dataLayer'?'&l='+l:'';j.async=true;j.src='https://www.googletagmanager.com/gtm.js?id='+i+dl;f.parentNode.insertBefore(j,f);})(window,document,'script','dataLayer','GTM-K279D39R'); Browse Preprints In Review Journals COVID-19 Preprints AJE Video Bytes Research Tools Research Promotion AJE Professional Editing AJE Rubriq About Preprint Platform In Review Editorial Policies Our Team Advisory Board Help Center Sign In Submit a Preprint Cite Share Download PDF Research Article Economic Analysis of Set-Asides in Public Procurement: Advancing Human Rights Goals Astha Srivastava This is a preprint; it has not been peer reviewed by a journal. https://doi.org/ 10.21203/rs.3.rs-4334054/v1 This work is licensed under a CC BY 4.0 License Status: Posted Version 1 posted You are reading this latest preprint version Abstract Set-Aside policy is a common tool in public procurement to promote horizontal objectives like support to small businesses, domestic produce etc. Under set-aside policy, a fraction of the procurement volume (termed the quantum of set-aside) is reserved for vendors that comply with the condition/standards stipulated in the policy. In this paper, an economic analysis of set-aside policy in public procurement is made to find out the extent to which a set-aside policy can induce vendors to comply with the stipulated standards. The analysis is then extended to make a specific study on use of set-asides for promoting human rights in business connections of public procurement agencies. Under the United Nations Guiding Principles on Business and Human Rights, States are expected to utilise their leverage in public procurements to engender respect for human rights in their business connections. Set-asides for human rights compliance is a natural choice for achieving this horizontal objective of public procurement. The analysis departs from the traditional economic analysis and the usual economic conception of “maximum utility”. Instead, this analysis focusses on the notion of “universal compliance”, the hallmark of human rights discourse, as a measure of efficiency. This allows the researcher to suggest some practical measures that states can adopt for ensuring universal compliance by vendors with stipulated standards using set-aside policy. This analysis also enables the researcher to arrive at an economic definition of the term “leverage” used in the Business and Human Rights discourse which underpins the additional responsibility of states for protecting human rights in its business connections. The paper makes the following original contributions to the existing literature. Firstly, a new economic model for set-aside policies in public procurement has been developed and used for understanding how and why the policy works to promote desired social goals. Secondly, a new concept of “maximum compliance/universal compliance” instead of “maximum utility”, as a measure of economic efficiency, is introduced and used for economic analysis of set-aside policy. Thirdly, an economic definition of “leverage”, as used in the field of Business and Human Rights, is presented. JEL Classification: K23, K38 Public Procurement Set- Asides Economic analysis of law Business and Human Rights. Introduction 1.1 Public Procurement for Promoting Social Goals Public procurement is a significant expenditure in most countries, often amounting to 15–20 percent of GDP (Siyal, 2020 ). Several international agencies and instruments recognise the role and impact of public procurements in furthering human rights (United Nations, 2011 ), sustainable development ( Transforming Our World: The 2030 Agenda for Sustainable Development. UN Doc No A/RES/70/1 , 2015) etc. Focus of public procurements over the past few decades has indeed been shifting from an adversarial and competitive tendering towards valuing social impact, public, private partnership and sustained supply chain relationships (Loosemore, 2016 ). UN Sustainable Development Goal (SDG) 12 (objectives on public procurement), Target 12.7 is to promote public procurement practices that are sustainable, in accordance with national policies and priorities. Today, public procurement is widely used to promote objectives of an economic, environmental and social nature, such as the economic development of disadvantaged social groups, with the use of different types of “horizontal” policies. (Arrowsmith, 2010 ; Calleja, 2015 ; Guarnieri & Gomes, 2019 ; McCrudden, 2004 ; Quinot, 2019 ; Semple, 2017 ); But the transition from traditional to social procurement is obstructed by barriers such as governmental culture, lack of knowledge and experience of procurement professionals related to social indicators, the difficulty to measure and evaluate social value, limited organizational capacity and limited capacity of organizations to demonstrate its social value added (Barraket & Weissman., 2009) Promotion of human rights is one of the most important social objectives that can be integrated with public procurement. Several scholars have explored the role of international instruments including the WTO General Procurement Agreement and United Nations Guiding Principles (UNGPs) on Business and Human Rights (BHR) in promoting human rights through public procurements (Corvaglia, 2017 ; Griller, 2003 ; Morettini, 2011 ; Outhwaite, 2019 ). The United Nations Guiding Principles on Business and Human Rights base themselves on the troika of “Protect, Respect and remedy” principles, where the businesses are expected to “respect” human rights and the state is expected to “protect” human rights in their jurisdiction. UNGPs extend the government’s role to “protect” human rights from merely a law making and regulatory exercise to include its managerial responsibility of using its leverage as a big market player to engender respect for human rights in its business connections. Under the UNGPs, Public procurement is envisaged as a tool at the hands of the State to promote human rights since public buyers have a significant leverage over corporate practices in their supply chain (O Martin-Ortega & O’Brien, 2019 ; Olga Martin-Ortega, 2018 , 2019 ; Uysal, 2021 ). 1.2 The Policy of Set-Aside in Public Procurement Set-asides are an important public policy mechanism used for implementing social linkages in public procurement. While the detailed implementation of policy varies across jurisdictions, typically under a policy of set-aside a portion of the contract quantity is reserved for vendors that comply with a certain “standard”. Most commonly used “standards” are the size of the enterprise, minimum local content of the product offered, gender parity in workforce etc. This approach has been widely used in the US and Canada (Cravero, 2017 ), and permitted by the 2004 and 2014 EU Public Procurement Directives (Lichère et al., 2014 ). Intuitively a policy of set-asides in public procurement would encourage the class of vendors for which set-aside benefits have been made available. Research shows the positive impact of set-aside policy empirically. Analysis of the relationship between preferential programs like set-asides and the social linkages of public procurement across jurisdictions has shown that set-asides have become a powerful tool for providing economic opportunities for disadvantaged groups (Cravero, 2017 ; Quinot & Sue, 2013 ).. It has been shown that to benefit from set-asides, appropriate groups ought to be targeted. A system for protests to the government’s evaluation process is crucial. Due consideration must be given to the non-economic objectives of the nation (Bates, 2013 ; Lavallée, 2013 ). Impediments like contract bundling, strategic sourcing resulting in supplier rationalization, a lack of accountability for achieving socio-economic goals, a lack of small businesses in some industries and many small businesses’ lack of interest in government work must be overcome (Moore et al., 2014 ).It has also been shown that a substantial percent of these businesses would exit the procurement market if set-asides were removed and, surprisingly, the resulting lack of competition would increase government procurement costs more than it would offset the production cost inefficiency (Nakabayashi, 2013 ). Thus, it is adequately established that policy of set-aside indeed works. But why and to what extent this policy works is much less clear. While there are incentives for vendors to comply because of set-aside benefit, there are also costs involved for vendors to comply with the standard and therefore there is a cost benefit trade-off involved. Further, there is the possibility of crowding, that is, if almost all vendors comply with the standard, they all come back on the same equal footing losing any preferential status. In other words, the preferential benefit for a particular vendor depends on what strategy other vendors adopt. This policy is therefore a fit case for an economic analysis. 1.3 Brief Background of Economic Analysis of Laws Laws and regulations are the most common mechanisms utilised by State to shape the socio-economic outcome in its jurisdiction. It is for this reason that an economic analysis of these laws to ascertain their efficiency becomes very important. The field of Law and economics deals with this analysis of government laws and regulations. Economic analysis of laws has given many interesting insights in various fields of law including accident law (Brown, 1973 ; Kaplow & Shavell, 1994 , 1996 ; Shavell, 2013 ; Srivastava & Srivastava, 2021 ), criminal law (Becker, 1968 ) among others. Economic analysis of public policy has also been done. It has been shown that an agency problem exists as public policy promotes macro-level benefits, but government agencies’ primary concern is on the operational mission. Economic analysis shows that government buyers often support small business goals only to the extent that they must comply with government regulations. Economic analysis has also shown that conflicting goals are a manifestation of the principle-agent problem endemic to public policy including that of set-asides (Jensen & Meckling, 2019 ). The efficiency of set-aside auctions has been empirically studied (Tkachenko et al., 2015 ) and found that benefits accruing from set-aside auctions depend on factors like reserve price and number of bidders. Expected pros and cons of the division of procurement contracts into lots have been enumerated (Zimmermann, 2017 ) and it is opined that a general obligation to divide procurement contract but allowing certain exceptions increase economic efficiency. However, no attempt has been made in prior literature to develop an economic model for the set-aside policy. This paper attempts to fill this research gap. An economic analysis of the policy of set-asides should be fruitful in developing an understanding about how a set-aside policy helps in achieving the desired social outcome. Such an understanding can be of immense value in designing the contours of set-aside policy. 1.4 Economic Analysis of Set-Aside Policy The working and efficiency of a set-aside policy can be studied from two main aspects: Whether a certain standard, if complied, will result in desired social outcomes. For example, can encouraging vendors that comply with ISO 14000 help in reducing adverse environmental impact. Whether the policy of set-aside can actually induce vendors to comply with the said standard. For example, to what extent would a set-aside for vendors that comply with ISO 14000 induce the vendors in public procurements to comply with this standard. Undoubtedly, the first question is very important from the perspective of the policy formulation to identify the “type” of standards that should be encouraged. The second question is also equally vital to assess whether set-aside policy can really be effective in providing such encouragement. This paper analyses the second question. In the first step, an analysis of the incentives provided by a set-aside policy for vendors to switch from non-compliant to compliant group is made. The analysis in section 2 shows that a fraction of vendors will become compliant as a result of set-aside policy. Thereafter the specific case of using set-asides for promoting respect for human rights by vendors is analyses and results obtained are used to arrive at pertinent suggestions for policy making. 1.5 The Notion of “economic efficiency” in the context of human rights At this point, a revisit of the meaning of “economic efficiency” is warranted in the particular context of human rights. Ordinarily, the concept of “efficiency” as usually adopted in economic literature is the Potential Pareto efficiency or the Caldor Hicks efficiency and closely corresponds to Bentham’s maxim of “maximum benefit for the maximum number”. It seeks to maximize the overall economic utility for the society. This definition of efficiency is adopted because it is expected that state should design its laws in such a manner to maximise the overall economic utility. While this may appear to be a sound idea from a purely utilitarian principle, it is not without its own set-of problems. For example, this concept of overall utility maximisation is often attacked on the ground that it permits serious detriment to a certain section of society as long as the benefits accrued to others more than compensates for this. Of course, Caldor-Hicks efficiency is only one of the possible definitions of efficiency that can be used for analysis. Other efficiency principles do exist like Pareto principle. Similar to Bentham’s utilitarian principle, new measures of efficiency can also be discerned from other prescriptions in political philosophy. Thus, Rawls endorses the use of “maximin”, as the efficiency measure of choice (Rawls, 1971 ) that seeks to maximise the benefit that accrues to “the most disadvantaged individual” under the scheme. Similarly, the human rights paradigm revolves around the idea of “universality”, that is a core set-of rights that must be guaranteed for all individuals. Thus, in guaranteeing human rights, state is not seeking to maximise the utility of the society at large but rather seeking to ensure a minimum benchmark utility universally to all individuals. Correspondingly, the measure of efficiency should also move away from Caldor Hicks efficiency of utility maximisation to the maximization of the fraction of individuals that are able to enjoy the benchmark utility. This paper makes a departure from the usual Caldor Hicks efficiency and analyses set-asides from the lens of principle of universality which is relevant for human rights. Assuming that the fraction of individuals that are able to enjoy a human right is directly proportional to the number of vendors that comply with the said standard. Efficiency then would be measured based on how close one gets to universal compliance, i.e. compliance of desired standards by all vendors in the case of public procurements. An Economic Model of Set-Asides Policy 2.1 Assumptions: A. Open Competition Case (Without set-aside benefits): 1) Consider a sector of industry in which government is the only procurer. i.e., all sales are made to government only. In some sectors like defence this may actually be true. In many other sectors, government may not be the sole buyer but still a dominant buyer and therefore the qualitative results of this analysis can be expected to hold to a great degree. Analysing the case where government is one of the many buyers would be an interesting exercise that is left for future research. 2) There are N vendors operating in this sector. 3) All these vendors have equivalent cost functions. Ignoring any economies or diseconomies of scale, each of the vendor can produce any quantity of the relevant good at the same cost. 4) Another assumption is that all the vendors quote prices according to a probability distribution around the mean price s 0 . The probability distribution for price quotes is identical across all vendors and does not depend on quotes of other vendors or orders already received by this or other vendors. 5) The money value of government procurement is B. Further assume that the profit percentage earned by all the vendors from this business is p * 100 % In a government procurement tender in this open competition case, the vendor that quotes the lowest gets the order. As all vendors are equivalent in all ways, the probability of each vendor winning the tender = 1/N Thus, total profit made by each vendor in this free-market scenario = p.B/N. Denoting this “ open competition profit ” that each vendor will get as “b”. B. Competition With Set-Asides Now suppose government introduces a policy of set-aside wherein a fraction “m” of business volume is reserved for vendors that comply with a level of human rights standard “x”. This is a pre contract criteria. The essence of this policy is that in a tender if the lowest bidder is a vendor that complies with the stipulated human rights standard, it will get the complete order, which is called the “competitive order” for compliant vendor hereinafter. However, if the lowest bidder is a non-compliant vendor, it will get a fraction (1-m) of the total order value (the “ competitive order” for a non-compliant vendor”), the rest being ordered on the lowest compliant vendor, which is called the “set-aside order”. Further assuming that such placement of order on lowest compliant vendor is subject to the vendor accepting the price quoted by the lowest offer of the non-compliant vendor (also assuming that compliant vendors always accept the rates of the lowest offer). Suppose the cost incurred by vendor to achieve this standard of human rights is c(x). This can be seen to be the cost that the vendor has to spend per annum on steps for ensuring compliance (e.g. paying working wages, eliminating gender gap in pay, compliance certifications, if any etc.). Here, it is worth mentioning that some set-asides are provided to vendors by virtue of their status (e.g. for small and medium enterprises). In this case it is not straightforward to discern a cost of compliance. However, in several other cases the compliance can be connected to the extra effort (and hence the cost) by the vendor, for example in case of set-asides for promoting domestic produce, cost of compliance would be the extra cost incurred by manufacturer for sourcing the raw materials/components from domestic suppliers. Similarly, requirement of human rights standards would also entail a cost in terms of setting up system to ensure such a standard. Assuming that as a result of this policy of set-aside, K vendors are currently compliant with the standard of human rights “x”. Also, assuming that this change in policy does not change the price behaviour of either the compliant or non-compliant vendors, i.e. the probability distribution for prices quoted remains the same for all the vendors regardless of the fact whether they are compliant or otherwise. 2.2 Analysis of Vendors’ Incentives Case – 1: Non-Compliant Vendor Wins the tender. I. A non-compliant vendor will win the tender only if it quotes a price lower than all other vendors. As the probability distribution for prices quoted remains unchanged, the probability of a particular non-compliant vendor winning the tender is still 1/N II. Also, a non-compliant vendor on winning the tender gets a fraction (1-m) of the order (the competitive order for non-compliant vendor), III. So, expected profit of a non-compliant vendor by competitive orders is = (1-m).p.B/N = (1-m) * b, ….(1) where ‘b’ is the open competition profit IV. Now, there are (N-K) non-compliant vendors, so probability that any one of the non-compliant vendors wins the tender P_n= (N-K)/N. Consequentially, probability of any one of the compliant vendors winning the tender = P_c = 1 – P_n = K/N V. Further, a particular compliant vendor will get a fraction ‘m’ of order (the set-aside order) if a non compliant vendor wins the tender, and this compliant vendor is the lowest among all compliant vendors. Once again by symmetry, the probability that a particular compliant vendor quoted the lowest among all K compliant vendors = 1/K VI. So, the expected value of profits to a particular compliant vendor because of set-aside orders = m.p.B (P_n * 1/K) = m.p.B.(1/K – 1/N) ….(2) Case – 2: Compliant vendor wins the tender. VII. By symmetry, probability of a particular compliant vendor winning a tender = P_c / K = 1/N which is as expected. VIII. In this case, the compliant vendor gets 100% of the order (competitive order for a compliant vendor), so expected value of profits of a compliant vendor from competitive orders = p.B/N = b ….(3) IX. Non compliant vendors will not get any order in this case. Aggregate Expected Profits X. Hence, the expected value of profit for a compliant vendor (including both competitive orders and set-aside orders) = (2) + (3) = m.p.B/K + (1-m)p.B/N ….(4) XI. The expected value of profits of a non compliant vendor = (1) as there is no order on non compliant vendor in case 2 = (1-m) * b ….(5) A vendor that is currently non-compliant can get an additional profit if it becomes compliant. The value of additional profit is = (4) – (5) m.p.B/K + (1-m).p.B/N – (1-m).p.B/N = m.p.B/K ….(6) Define 'f’ as the fraction of vendors that are compliant = K/N Then (6) can be written as m.p.B/K = m.p.B/N *(N/K) = m.b/f The vendor would have an incentive to become compliant if additional profit accrued is greater than the cost for compliance with standard ‘x’, i.e. m.b/f > c(x) In the limiting case, m.b/f = c or Where, ‘m’ is the quantum of set-aside benefit for compliant vendors. ‘b’ is the open competition profit as defined earlier. ‘c’ is the cost incurred by a vendor to comply with the standard prescribed in set-aside policy. ‘f’ is the fraction of vendors that will be induced to become compliant as a result of the set-aside policy. It is easy to see that this is a point of Nash equilibrium. If the actual fraction of compliance f’ is greater than f, i.e. f’ > f, then each compliant vendor will have incentive to switch back to non-compliance and save on compliance costs thus bringing down f’. The reverse is true of f’ 0, thus all non-compliant vendors shall be at x = 0. Similarly, there is no incentive for compliant vendors to go beyond ‘x’. The real life implication of the derived equation is that, given a sector where open competition profit of individual vendors is ‘b’, a set-aside policy that reserves a fraction ‘m’ of the contract value for compliant vendors and the cost of compliance for a vendor being ‘c’, the fraction of vendors that actually will switch to compliance due to the set-aside policy is directly proportional to the quantum of set-aside benefit ‘m’ and the ratio of open competition profit to the cost of compliance (‘b/c’) Evidently, as the government raises the standard of compliance x, the utility of such compliance (for the society) will go up, but the cost of compliance will also go up, while also reducing the fraction of vendors actually complying with the standard. Thus, after a certain stage, the benefits of higher standards would be overshadowed by reduction in the fraction of vendors that actually comply. Finding the ‘x’ that will maximise the overall utility as is done in standard economic analysis. Suppose that each vendor that complies with standard of human rights “x” creates a human rights utility g(x) for society. Using the concept of Caldor Hicks efficiency N.f. g(x) is the total utility created and N.f.c(x) is the total cost incurred (non-compliant firms do not incur any cost). “Optimal” outcome would be when, N.f.g(x) – N.f.c(x) is maximum. This implies (all primes denote derivative w.r.t. ‘x’) f’(g – c) + f(g’ – c’) = 0 i.e. (m.b.c’/c 2 ) * (g – c) = (m.b/c) * (g’ – c’) => c’/c = (g’ – c’)/(g – c) ….(8) It is seen that “optimal standard” to be adopted is not influenced by the quantum of set-aside benefit ‘m’ or the open competition profits ‘b’. 2.3 Revisiting the Results with “Universality” as a Measure of Efficiency Till now an analysis of set-aside policy for its effectiveness in inducing vendors to comply with the stipulated standard has been done. This is generic and is not specific to human rights. Now analysing the result in eq.(7) not for optimising overall utility as done in eq.(8) but for achieving universality, i.e. the fraction ‘f’ should be as near to 1 as possible, in other words maximising the value of ‘f’. This becomes the definition of efficiency for the following analysis. From eq.(7)… f = m/(c/b) Clearly, as m is always less than 1, c/b must always be <= 1, if f =1 is desired. Further, for any value of c/b, the ratio f can be increased by simply increasing m. However, the percentage change in ‘f’ consequent to change in ‘m’ does depend on (c/b). Thus, if c/b= 10, even if government increases the quantum of set-aside from 0% to 100%, the percentage compliance goes from 0 to 10% only. That is, if the cost of compliance is very high (compared with open competition profits), a set-aside policy may not be effective in inducing a substantial fraction of vendors to comply. This gives the result that for achieving universality: 1) The cost of compliance should be reasonable (c b will never allow ‘f’ to reach 1 2) The value of m should be as high as possible (preferably nearer to 1). 3) Further, if an x is chosen such that c(x) < b, the fraction of vendors complying can be kept the same by increasing m and x together, which will improve the standard of human rights while keeping the fraction of vendors that comply the same. Thus, from the perspective of objective of universality, optimal solution demands This implies that the government should establish standard for compliance ‘x’ at such a level that cost of compliance for vendors is equal to the open competition profit. Secondly, the quantum of preference should be 100%, in other words, nearly all the quantities should be reserved for compliant vendors only. 2.4 Limitation of This Analysis: Apart from the usual economic assumptions like identical vendors, ignoring economies/diseconomies of scale etc, an important assumption the analysis is about the pricing behaviour of firms. In particular, presuming that the compliant firms and non-compliant firms continue to follow identical pricing strategy even in the set-aside case. This may or may not be true. An increase in the quoted price (in terms of the mean of the probability distribution) can increase the percentage profits of a compliant vendor in a set-aside order while at the same time reducing the possibility of such vendor getting a competitive order. The exact analysis considering the possibility of a change in pricing strategy would require more involved analysis, but it is expected that the qualitative results of this analysis would remain valid even under this scenario. Further, in one alternate policy prescription, where the lowest compliant vendor is required to match the price of lowest offer price of non-compliant vendor to get the set-aside order, the benefit of higher profit percentage in set-aside orders is lost and therefore pricing strategy may not have an impact on expected profits and therefore this analysis is expected to hold good in this situation too. This stipulation of price matching is not unusual and is in fact already in use, for example in set-aside policies in vogue in India where the preferential (compliant) vendors are required to match the price of non-compliant vendors to get the set-aside order. Conclusion 4.1 Guidance for Policy Formulation on Set-Asides for Human Rights government should procure predominantly from compliant group only, and the stipulated standard of compliance should be kept reasonable (such that its cost of compliance is below open competition profits in that sector) so that universal compliance is incentivised. This result also highlights an important policy space for the State. A near 100% compliance is possible even if the quantum of set-aside is substantially less than 100%. For example, if 100% set-aside is not politically expedient for any reason, the state can still ensure 100% compliance from the vendors, albeit at a reduced standard. For example, even if m = 0.5, universal compliance by vendors in this sector can still be ensured using set-asides if b < 0.5c. 4.2 Economic Definition of “Leverage” in BHR This analysis also ties in well with the concept of leverage in BHR. In BHR, the states are expected to use their leverage with their business connections to engender respect for human rights in such connections. While leverage is broadly understood to mean the capacity of the state to influence the businesses it contracts with, and it is expected that the leverage would correlate with the quantum of business that a vendor gets from the state, this analysis permits us to arrive at a precise economic definition of “leverage”, as discussed below. The fraction of compliance ‘f’ crucially depends on the ratio (b/c). Thus, in sector with high open competition profits ‘b’ for vendors, government can set-a higher standard of compliance without bringing (b/c) < 1 and therefore can expect 100% compliance even at such high standards. On the other hand, a sector with low ‘b’, the reverse would be true. Thus, this analysis indicates the open competition profit ‘b’ is a good “measure” of state’s leverage in a particular sector. This can be used by states to adopt differential standards of human rights compliance in different sectors based on its “leverage” in that sector. 4.3 Corroboration of Results with Empirical Findings The open competition profit ‘b’ itself depends on profit percentage ‘p’, Business volume ‘B’ and number of sellers ‘N’. which therefore would be the determining factors for how well the set-aside policy can be used in ensuring compliance in a particular sector. Interestingly, this inference is in consonance with the empirical findings of Tkachenko et al that benefit of set-aside auctions depend on reserve price (which directly relate to profits percentages for bidders) and number of bidders. Thus, it can be said that this is a realistic model, and inferences therefrom should be relevant in the real world. 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Constitutionalising public procurement through human rights: lessons from South Africa. In O Martin-Ortega & C. O’Brien (Eds.), Public Procurement and Human Rights . https://www.elgaronline.com/abstract/edcoll/9781788116305/9781788116305.00014.xml Quinot, G., & Sue, A. (2013). Public Procurement Regulations in Africa. VRÜ Verfassung Und Recht in Übersee . https://www.nomos-elibrary.de/10.5771/0506-7286-2013-3-349.pdf Rawls, J. (1971). Atheory of justice. In A Theory of Justice . Semple, A. (2017). Socially Responsible Public Procurement (SRPP) under EU Law and International Agreements. European Procurement & Public Private Partnership Law Review , 12 (3), 293–309. Shavell, S. (2013). A fundamental enforcement cost advantage of the negligence rule over regulation. Journal of Legal Studies , 42 (2), 275–302. https://doi.org/10.1086/673178 Siyal, S. (2020). Revolution and Public Administration in Pakistan. Researchgate.Net . https://doi.org/10.1007/978-3-319-31816-5_3870-1 Srivastava, A., & Srivastava, A. (2021). Economic Analysis of Accident Law: A New Liability Rule that Induces Socially Optimal Behaviour in Case of Limited Information. Review of Law and Economics , 17 (1), 119–131. https://doi.org/10.1515/rle-2019-0049 Tkachenko, A., Valbonesi, P., Shadrina, E., Shagbazian, G., Camboni, R., Decarolis, F., Moretti, L., Podkolzina, E., Spagnolo, G., Schoors, K., Tadelis, S., & Vinogradov, D. (2015). EFFICIENT DESIGN OF SET-ASIDE AUCTIONS FOR SMALL Efficient design of set-aside auctions for small businesses: an empirical analysis * . HSE-Moscow. https://www.economia.unipd.it/sites/economia.unipd.it/files/20190240-b.pdf Transforming our World: The 2030 Agenda for Sustainable Development. UN Doc No A/RES/70/1 . (2015). United Nations. (2011). UN Guiding Principles on Business and Human Rights HR/PUB/11/04. In United Nations Human Rights office of the High Commissioner . https://doi.org/10.4324/9780429290817-17 Uysal, E. (2021). Business and human rights: the state as a buyer. Eur. Procurement & Pub. Private Partnership L. Rev. , 16 . https://heinonline.org/hol-cgi-bin/get_pdf.cgi?handle=hein.journals/epppl2021§ion=10 Zimmermann, M. (2017). Economic efficiency and the division of large procurement contracts into lots: An analysis. Eur. Procurement & Pub. Private Partnership L. Rev. , 12 . https://heinonline.org/hol-cgi-bin/get_pdf.cgi?handle=hein.journals/epppl2017§ion=59 Additional Declarations No competing interests reported. Cite Share Download PDF Status: Posted Version 1 posted You are reading this latest preprint version Research Square lets you share your work early, gain feedback from the community, and start making changes to your manuscript prior to peer review in a journal. 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Several international agencies and instruments recognise the role and impact of public procurements in furthering human rights (United Nations, \u003cspan citationid=\"CR34\" class=\"CitationRef\"\u003e2011\u003c/span\u003e), sustainable development (\u003cem\u003eTransforming Our World: The 2030 Agenda for Sustainable Development. UN Doc No A/RES/70/1\u003c/em\u003e, 2015) etc. Focus of public procurements over the past few decades has indeed been shifting from an adversarial and competitive tendering towards valuing social impact, public, private partnership and sustained supply chain relationships (Loosemore, \u003cspan citationid=\"CR16\" class=\"CitationRef\"\u003e2016\u003c/span\u003e). UN Sustainable Development Goal (SDG) 12 (objectives on public procurement), Target 12.7 is to promote public procurement practices that are sustainable, in accordance with national policies and priorities. Today, public procurement is widely used to promote objectives of an economic, environmental and social nature, such as the economic development of disadvantaged social groups, with the use of different types of \u0026ldquo;horizontal\u0026rdquo; policies. (Arrowsmith, \u003cspan citationid=\"CR1\" class=\"CitationRef\"\u003e2010\u003c/span\u003e; Calleja, \u003cspan citationid=\"CR6\" class=\"CitationRef\"\u003e2015\u003c/span\u003e; Guarnieri \u0026amp; Gomes, \u003cspan citationid=\"CR10\" class=\"CitationRef\"\u003e2019\u003c/span\u003e; McCrudden, \u003cspan citationid=\"CR20\" class=\"CitationRef\"\u003e2004\u003c/span\u003e; Quinot, \u003cspan citationid=\"CR25\" class=\"CitationRef\"\u003e2019\u003c/span\u003e; Semple, \u003cspan citationid=\"CR28\" class=\"CitationRef\"\u003e2017\u003c/span\u003e); But the transition from traditional to social procurement is obstructed by barriers such as governmental culture, lack of knowledge and experience of procurement professionals related to social indicators, the difficulty to measure and evaluate social value, limited organizational capacity and limited capacity of organizations to demonstrate its social value added (Barraket \u0026amp; Weissman., 2009)\u003c/p\u003e \u003cp\u003ePromotion of human rights is one of the most important social objectives that can be integrated with public procurement. Several scholars have explored the role of international instruments including the WTO General Procurement Agreement and United Nations Guiding Principles (UNGPs) on Business and Human Rights (BHR) in promoting human rights through public procurements (Corvaglia, \u003cspan citationid=\"CR7\" class=\"CitationRef\"\u003e2017\u003c/span\u003e; Griller, \u003cspan citationid=\"CR9\" class=\"CitationRef\"\u003e2003\u003c/span\u003e; Morettini, \u003cspan citationid=\"CR22\" class=\"CitationRef\"\u003e2011\u003c/span\u003e; Outhwaite, \u003cspan citationid=\"CR24\" class=\"CitationRef\"\u003e2019\u003c/span\u003e).\u003c/p\u003e \u003cp\u003eThe United Nations Guiding Principles on Business and Human Rights base themselves on the troika of \u0026ldquo;Protect, Respect and remedy\u0026rdquo; principles, where the businesses are expected to \u0026ldquo;respect\u0026rdquo; human rights and the state is expected to \u0026ldquo;protect\u0026rdquo; human rights in their jurisdiction. UNGPs extend the government\u0026rsquo;s role to \u0026ldquo;protect\u0026rdquo; human rights from merely a law making and regulatory exercise to include its managerial responsibility of using its leverage as a big market player to engender respect for human rights in its business connections. Under the UNGPs, Public procurement is envisaged as a tool at the hands of the State to promote human rights since public buyers have a significant leverage over corporate practices in their supply chain (O Martin-Ortega \u0026amp; O\u0026rsquo;Brien, \u003cspan citationid=\"CR17\" class=\"CitationRef\"\u003e2019\u003c/span\u003e; Olga Martin-Ortega, \u003cspan citationid=\"CR18\" class=\"CitationRef\"\u003e2018\u003c/span\u003e, \u003cspan citationid=\"CR17\" class=\"CitationRef\"\u003e2019\u003c/span\u003e; Uysal, \u003cspan citationid=\"CR35\" class=\"CitationRef\"\u003e2021\u003c/span\u003e).\u003c/p\u003e \u003c/div\u003e \u003cdiv id=\"Sec3\" class=\"Section2\"\u003e \u003ch2\u003e1.2 The Policy of Set-Aside in Public Procurement\u003c/h2\u003e \u003cp\u003eSet-asides are an important public policy mechanism used for implementing social linkages in public procurement. While the detailed implementation of policy varies across jurisdictions, typically under a policy of set-aside a portion of the contract quantity is reserved for vendors that comply with a certain \u0026ldquo;standard\u0026rdquo;. Most commonly used \u0026ldquo;standards\u0026rdquo; are the size of the enterprise, minimum local content of the product offered, gender parity in workforce etc. This approach has been widely used in the US and Canada (Cravero, \u003cspan citationid=\"CR8\" class=\"CitationRef\"\u003e2017\u003c/span\u003e), and permitted by the 2004 and 2014 EU Public Procurement Directives (Lich\u0026egrave;re et al., \u003cspan citationid=\"CR15\" class=\"CitationRef\"\u003e2014\u003c/span\u003e).\u003c/p\u003e \u003cp\u003eIntuitively a policy of set-asides in public procurement would encourage the class of vendors for which set-aside benefits have been made available. Research shows the positive impact of set-aside policy empirically. Analysis of the relationship between preferential programs like set-asides and the social linkages of public procurement across jurisdictions has shown that set-asides have become a powerful tool for providing economic opportunities for disadvantaged groups (Cravero, \u003cspan citationid=\"CR8\" class=\"CitationRef\"\u003e2017\u003c/span\u003e; Quinot \u0026amp; Sue, \u003cspan citationid=\"CR26\" class=\"CitationRef\"\u003e2013\u003c/span\u003e).. It has been shown that to benefit from set-asides, appropriate groups ought to be targeted. A system for protests to the government\u0026rsquo;s evaluation process is crucial. Due consideration must be given to the non-economic objectives of the nation (Bates, \u003cspan citationid=\"CR3\" class=\"CitationRef\"\u003e2013\u003c/span\u003e; Lavall\u0026eacute;e, \u003cspan citationid=\"CR14\" class=\"CitationRef\"\u003e2013\u003c/span\u003e). Impediments like contract bundling, strategic sourcing resulting in supplier rationalization, a lack of accountability for achieving socio-economic goals, a lack of small businesses in some industries and many small businesses\u0026rsquo; lack of interest in government work must be overcome (Moore et al., \u003cspan citationid=\"CR21\" class=\"CitationRef\"\u003e2014\u003c/span\u003e).It has also been shown that a substantial percent of these businesses would exit the procurement market if set-asides were removed and, surprisingly, the resulting lack of competition would increase government procurement costs more than it would offset the production cost inefficiency (Nakabayashi, \u003cspan citationid=\"CR23\" class=\"CitationRef\"\u003e2013\u003c/span\u003e). Thus, it is adequately established that policy of set-aside indeed works.\u003c/p\u003e \u003cp\u003eBut why and to what extent this policy works is much less clear. While there are incentives for vendors to comply because of set-aside benefit, there are also costs involved for vendors to comply with the standard and therefore there is a cost benefit trade-off involved. Further, there is the possibility of crowding, that is, if almost all vendors comply with the standard, they all come back on the same equal footing losing any preferential status. In other words, the preferential benefit for a particular vendor depends on what strategy other vendors adopt. This policy is therefore a fit case for an economic analysis.\u003c/p\u003e \u003c/div\u003e \u003cdiv id=\"Sec4\" class=\"Section2\"\u003e \u003ch2\u003e1.3 Brief Background of Economic Analysis of Laws\u003c/h2\u003e \u003cp\u003eLaws and regulations are the most common mechanisms utilised by State to shape the socio-economic outcome in its jurisdiction. It is for this reason that an economic analysis of these laws to ascertain their efficiency becomes very important. The field of Law and economics deals with this analysis of government laws and regulations. Economic analysis of laws has given many interesting insights in various fields of law including accident law (Brown, \u003cspan citationid=\"CR5\" class=\"CitationRef\"\u003e1973\u003c/span\u003e; Kaplow \u0026amp; Shavell, \u003cspan citationid=\"CR12\" class=\"CitationRef\"\u003e1994\u003c/span\u003e, \u003cspan citationid=\"CR13\" class=\"CitationRef\"\u003e1996\u003c/span\u003e; Shavell, \u003cspan citationid=\"CR29\" class=\"CitationRef\"\u003e2013\u003c/span\u003e; Srivastava \u0026amp; Srivastava, \u003cspan citationid=\"CR31\" class=\"CitationRef\"\u003e2021\u003c/span\u003e), criminal law (Becker, \u003cspan citationid=\"CR4\" class=\"CitationRef\"\u003e1968\u003c/span\u003e) among others. Economic analysis of public policy has also been done. It has been shown that an agency problem exists as public policy promotes macro-level benefits, but government agencies\u0026rsquo; primary concern is on the operational mission. Economic analysis shows that government buyers often support small business goals only to the extent that they must comply with government regulations. Economic analysis has also shown that conflicting goals are a manifestation of the principle-agent problem endemic to public policy including that of set-asides (Jensen \u0026amp; Meckling, \u003cspan citationid=\"CR11\" class=\"CitationRef\"\u003e2019\u003c/span\u003e). The efficiency of set-aside auctions has been empirically studied (Tkachenko et al., \u003cspan citationid=\"CR32\" class=\"CitationRef\"\u003e2015\u003c/span\u003e) and found that benefits accruing from set-aside auctions depend on factors like reserve price and number of bidders. Expected pros and cons of the division of procurement contracts into lots have been enumerated (Zimmermann, \u003cspan citationid=\"CR36\" class=\"CitationRef\"\u003e2017\u003c/span\u003e) and it is opined that a general obligation to divide procurement contract but allowing certain exceptions increase economic efficiency.\u003c/p\u003e \u003cp\u003eHowever, no attempt has been made in prior literature to develop an economic model for the set-aside policy. This paper attempts to fill this research gap. An economic analysis of the policy of set-asides should be fruitful in developing an understanding about how a set-aside policy helps in achieving the desired social outcome. Such an understanding can be of immense value in designing the contours of set-aside policy.\u003c/p\u003e \u003c/div\u003e \u003cdiv id=\"Sec5\" class=\"Section2\"\u003e \u003ch2\u003e1.4 Economic Analysis of Set-Aside Policy\u003c/h2\u003e \u003cp\u003eThe working and efficiency of a set-aside policy can be studied from two main aspects:\u003c/p\u003e \u003cp\u003e \u003col\u003e \u003cspan\u003e \u003cli\u003e \u003cp\u003eWhether a certain standard, if complied, will result in desired social outcomes. For example, can encouraging vendors that comply with ISO 14000 help in reducing adverse environmental impact.\u003c/p\u003e \u003c/li\u003e \u003c/span\u003e \u003cspan\u003e \u003cli\u003e \u003cp\u003eWhether the policy of set-aside can actually induce vendors to comply with the said standard. For example, to what extent would a set-aside for vendors that comply with ISO 14000 induce the vendors in public procurements to comply with this standard.\u003c/p\u003e \u003c/li\u003e \u003c/span\u003e \u003c/ol\u003e \u003cdiv class=\"BlockQuote\"\u003e \u003cp\u003eUndoubtedly, the first question is very important from the perspective of the policy formulation to identify the \u0026ldquo;type\u0026rdquo; of standards that should be encouraged. The second question is also equally vital to assess whether set-aside policy can really be effective in providing such encouragement. This paper analyses the second question. In the first step, an analysis of the incentives provided by a set-aside policy for vendors to switch from non-compliant to compliant group is made. The analysis in section 2 shows that a fraction of vendors will become compliant as a result of set-aside policy. Thereafter the specific case of using set-asides for promoting respect for human rights by vendors is analyses and results obtained are used to arrive at pertinent suggestions for policy making.\u003c/p\u003e \u003c/div\u003e \u003c/p\u003e \u003c/div\u003e \u003cdiv id=\"Sec6\" class=\"Section2\"\u003e \u003ch2\u003e1.5 The Notion of \u0026ldquo;economic efficiency\u0026rdquo; in the context of human rights\u003c/h2\u003e \u003cp\u003eAt this point, a revisit of the meaning of \u0026ldquo;economic efficiency\u0026rdquo; is warranted in the particular context of human rights. Ordinarily, the concept of \u0026ldquo;efficiency\u0026rdquo; as usually adopted in economic literature is the Potential Pareto efficiency or the Caldor Hicks efficiency and closely corresponds to Bentham\u0026rsquo;s maxim of \u0026ldquo;maximum benefit for the maximum number\u0026rdquo;. It seeks to maximize the overall economic utility for the society. This definition of efficiency is adopted because it is expected that state should design its laws in such a manner to maximise the overall economic utility. While this may appear to be a sound idea from a purely utilitarian principle, it is not without its own set-of problems. For example, this concept of overall utility maximisation is often attacked on the ground that it permits serious detriment to a certain section of society as long as the benefits accrued to others more than compensates for this.\u003c/p\u003e \u003cp\u003eOf course, Caldor-Hicks efficiency is only one of the possible definitions of efficiency that can be used for analysis. Other efficiency principles do exist like Pareto principle. Similar to Bentham\u0026rsquo;s utilitarian principle, new measures of efficiency can also be discerned from other prescriptions in political philosophy. Thus, Rawls endorses the use of \u0026ldquo;maximin\u0026rdquo;, as the efficiency measure of choice (Rawls, \u003cspan citationid=\"CR27\" class=\"CitationRef\"\u003e1971\u003c/span\u003e) that seeks to maximise the benefit that accrues to \u0026ldquo;the most disadvantaged individual\u0026rdquo; under the scheme. Similarly, the human rights paradigm revolves around the idea of \u0026ldquo;universality\u0026rdquo;, that is a core set-of rights that must be guaranteed for all individuals. Thus, in guaranteeing human rights, state is not seeking to maximise the utility of the society at large but rather seeking to ensure a minimum benchmark utility universally to all individuals. Correspondingly, the measure of efficiency should also move away from Caldor Hicks efficiency of utility maximisation to the maximization of the fraction of individuals that are able to enjoy the benchmark utility.\u003c/p\u003e \u003cp\u003eThis paper makes a departure from the usual Caldor Hicks efficiency and analyses set-asides from the lens of principle of universality which is relevant for human rights. Assuming that the fraction of individuals that are able to enjoy a human right is directly proportional to the number of vendors that comply with the said standard. Efficiency then would be measured based on how close one gets to universal compliance, i.e. compliance of desired standards by all vendors in the case of public procurements.\u003c/p\u003e \u003c/div\u003e"},{"header":"An Economic Model of Set-Asides Policy","content":"\u003ch3\u003e2.1 Assumptions:\u003c/h3\u003e\n\u003cp\u003e\u003cstrong\u003eA. \u0026nbsp;\u003c/strong\u003e\u003cstrong\u003eOpen Competition Case (Without set-aside benefits):\u003c/strong\u003e\u003c/p\u003e\n\u003cp\u003e1) \u0026nbsp; Consider a sector of industry in which government is the only procurer. i.e., all sales are made to government only. In some sectors like defence this may actually be true. In many other sectors, government may not be the sole buyer but still a dominant buyer and therefore the qualitative results of this analysis can be expected to hold to a great degree. Analysing the case where government is one of the many buyers would be an interesting exercise that is left for future research.\u003c/p\u003e\n\u003cp\u003e2) \u0026nbsp; There are N vendors operating in this sector.\u003c/p\u003e\n\u003cp\u003e3) \u0026nbsp; All these vendors have equivalent cost functions. Ignoring any economies or diseconomies of scale, each of the vendor can produce any quantity of the relevant good at the same cost.\u003c/p\u003e\n\u003cp\u003e4) \u0026nbsp; Another assumption is that all the vendors quote prices according to a probability distribution around the mean price s\u003csub\u003e0\u003c/sub\u003e. The probability distribution for price quotes is identical across all vendors and does not depend on quotes of other vendors or orders already received by this or other vendors.\u003c/p\u003e\n\u003cp\u003e5) \u0026nbsp; The money value of government procurement is B. Further assume that the profit percentage earned by all the vendors from this business is p * 100 %\u003c/p\u003e\n\u003cp\u003eIn a government procurement tender in this open competition case, the vendor that quotes the lowest gets the order. As all vendors are equivalent in all ways, the probability of each vendor winning the tender = 1/N\u003c/p\u003e\n\u003cp\u003eThus, total profit made by each vendor in this free-market scenario = p.B/N. Denoting this “\u003cem\u003eopen competition profit\u003c/em\u003e” that each vendor will get as “b”.\u003c/p\u003e\n\u003cp\u003e\u003cstrong\u003eB. \u0026nbsp;\u003c/strong\u003e\u003cstrong\u003eCompetition With Set-Asides\u003c/strong\u003e\u003c/p\u003e\n\u003cp\u003eNow suppose government introduces a policy of set-aside wherein a fraction “m” of business volume is reserved for vendors that comply with a level of human rights standard “x”. This is a pre contract criteria. The essence of this policy is that in a tender if the lowest bidder is a vendor that complies with the stipulated human rights standard, it will get the complete order, which is called the “competitive order” for compliant vendor hereinafter. However, if the lowest bidder is a non-compliant vendor, it will get a fraction (1-m) of the total order value (the \u003cstrong\u003e“\u003c/strong\u003ecompetitive order” for a non-compliant vendor”), the rest being ordered on the lowest compliant vendor, which is called the “set-aside order”. Further assuming that such placement of order on lowest compliant vendor is subject to the vendor accepting the price quoted by the lowest offer of the non-compliant vendor (also assuming that compliant vendors always accept the rates of the lowest offer).\u003c/p\u003e\n\u003cp\u003eSuppose the cost incurred by vendor to achieve this standard of human rights is c(x).\u003c/p\u003e\n\u003cp\u003eThis can be seen to be the cost that the vendor has to spend per annum on steps for ensuring compliance (e.g. paying working wages, eliminating gender gap in pay, compliance certifications, if any etc.). Here, it is worth mentioning that some set-asides are provided to vendors by virtue of their status (e.g. for small and medium enterprises). In this case it is not straightforward to discern a cost of compliance. However, in several other cases the compliance can be connected to the extra effort (and hence the cost) by the vendor, for example in case of set-asides for promoting domestic produce, cost of compliance would be the extra cost incurred by manufacturer for sourcing the raw materials/components from domestic suppliers. Similarly, requirement of human rights standards would also entail a cost in terms of setting up system to ensure such a standard.\u003c/p\u003e\n\u003cp\u003eAssuming that as a result of this policy of set-aside, K vendors are currently compliant with the standard of human rights “x”. Also, assuming that this change in policy does not change the price behaviour of either the compliant or non-compliant vendors, i.e. the probability distribution for prices quoted remains the same for all the vendors regardless of the fact whether they are compliant or otherwise.\u003c/p\u003e\n\u003ch3\u003e2.2 Analysis of Vendors’ Incentives\u003c/h3\u003e\n\u003cp\u003e\u003cstrong\u003eCase – 1: Non-Compliant Vendor Wins the tender.\u003c/strong\u003e\u003c/p\u003e\n\u003cp\u003eI. \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp;A non-compliant vendor will win the tender only if it quotes a price lower than all other vendors. As the probability distribution for prices quoted remains unchanged, the probability of \u003cem\u003ea particular non-compliant vendor\u003c/em\u003e winning the tender is still 1/N\u003c/p\u003e\n\u003cp\u003eII. \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; Also, a non-compliant vendor on winning the tender gets a fraction (1-m) of the order (the competitive order for non-compliant vendor),\u003c/p\u003e\n\u003cp\u003eIII. \u0026nbsp; \u0026nbsp; \u0026nbsp; So, expected profit \u003cem\u003eof a non-compliant vendor\u003c/em\u003e by competitive orders is\u003c/p\u003e\n\u003cp\u003e= (1-m).p.B/N = (1-m) * b, \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; ….(1)\u003c/p\u003e\n\u003cp\u003ewhere ‘b’ is the open competition profit\u003c/p\u003e\n\u003cp\u003eIV. \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp;Now, there are (N-K) non-compliant vendors, so probability that any \u003cem\u003eone of the non-compliant vendors\u003c/em\u003e wins the tender\u0026nbsp;\u003c/p\u003e\n\u003cp\u003eP_n= (N-K)/N.\u0026nbsp;\u003c/p\u003e\n\u003cp\u003eConsequentially, probability of any \u003cem\u003eone of the compliant vendors\u003c/em\u003e winning the tender = P_c = 1 – P_n = K/N\u003c/p\u003e\n\u003cp\u003eV. \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; Further, \u003cem\u003ea particular compliant vendor\u003c/em\u003e will get a fraction ‘m’ of order (the set-aside order) if a non compliant vendor wins the tender, and this compliant vendor is the lowest among all compliant vendors. Once again by symmetry, the probability that a particular compliant vendor quoted the lowest among all K compliant vendors = 1/K\u003c/p\u003e\n\u003cp\u003eVI. \u0026nbsp; \u0026nbsp; \u0026nbsp; So, the expected value of profits to \u003cem\u003ea particular compliant vendor\u003c/em\u003e because of set-aside orders\u003c/p\u003e\n\u003cp\u003e= m.p.B (P_n * 1/K) = \u0026nbsp;m.p.B.(1/K – 1/N) \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; ….(2)\u003c/p\u003e\n\u003cp\u003e\u003cstrong\u003eCase – 2: Compliant vendor wins the tender.\u003c/strong\u003e\u003c/p\u003e\n\u003cp\u003eVII. \u0026nbsp; \u0026nbsp; \u0026nbsp;By symmetry, probability of a particular compliant vendor winning a tender\u0026nbsp;\u003c/p\u003e\n\u003cp\u003e= P_c / K = 1/N\u003c/p\u003e\n\u003cp\u003ewhich is as expected.\u003c/p\u003e\n\u003cp\u003eVIII. \u0026nbsp; \u0026nbsp;In this case, the compliant vendor gets 100% of the order (competitive order for a compliant vendor), so expected value of profits \u0026nbsp;of a compliant vendor from competitive orders\u003c/p\u003e\n\u003cp\u003e= p.B/N = b \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; ….(3)\u003c/p\u003e\n\u003cp\u003eIX. \u0026nbsp; \u0026nbsp; \u0026nbsp; Non compliant vendors will not get any order in this case.\u003c/p\u003e\n\u003cp\u003e\u003cstrong\u003eAggregate Expected Profits\u003c/strong\u003e\u003c/p\u003e\n\u003cp\u003eX. \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp;Hence, \u0026nbsp;the expected value of profit for a compliant vendor (including both competitive orders and set-aside orders)\u003c/p\u003e\n\u003cp\u003e= (2) + (3)\u003c/p\u003e\n\u003cp\u003e= m.p.B/K + (1-m)p.B/N \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp;….(4)\u003c/p\u003e\n\u003cp\u003eXI. \u0026nbsp; \u0026nbsp; \u0026nbsp; The expected value of profits of a non compliant vendor\u003c/p\u003e\n\u003cp\u003e= (1) \u0026nbsp; \u0026nbsp;as there is no order on non compliant vendor in case 2\u003c/p\u003e\n\u003cp\u003e= (1-m) * b \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp;….(5)\u003c/p\u003e\n\u003cp\u003eA vendor that is currently non-compliant can get an additional profit if it becomes compliant. The value of additional profit is\u003c/p\u003e\n\u003cp\u003e= (4) – (5)\u003c/p\u003e\n\u003cp\u003em.p.B/K + (1-m).p.B/N – (1-m).p.B/N = m.p.B/K \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp;….(6)\u003c/p\u003e\n\u003cp\u003eDefine 'f’ as the fraction of vendors that are compliant = K/N\u003c/p\u003e\n\u003cp\u003eThen (6) can be written as\u003c/p\u003e\n\u003cp\u003em.p.B/K = m.p.B/N *(N/K) = m.b/f\u003c/p\u003e\n\u003cp\u003eThe vendor would have an incentive to become compliant if additional profit accrued is greater than the cost for compliance with standard ‘x’, i.e.\u003c/p\u003e\n\u003cp\u003em.b/f \u0026gt; c(x)\u003c/p\u003e\n\u003cp\u003eIn the limiting case, m.b/f = c or\u003c/p\u003e\n\u003cp\u003e\u003cimg src=\"data:image/png;base64,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\" width=\"587\" height=\"41\"\u003e\u003c/p\u003e\n\u003cp\u003eWhere,\u003c/p\u003e\n\u003cp\u003e‘m’ is the quantum of set-aside benefit for compliant vendors.\u003c/p\u003e\n\u003cp\u003e‘b’ is the open competition profit as defined earlier.\u003c/p\u003e\n\u003cp\u003e‘c’ is the cost incurred by a vendor to comply with the standard prescribed in set-aside policy.\u003c/p\u003e\n\u003cp\u003e‘f’ is the fraction of vendors that will be induced to become compliant as a result of the set-aside policy.\u003c/p\u003e\n\u003cp\u003eIt is easy to see that this is a point of Nash equilibrium. If the actual fraction of compliance f’ is greater than f, i.e. f’ \u0026gt; f, then each compliant vendor will have incentive to switch back to non-compliance and save on compliance costs thus bringing down f’. The reverse is true of f’ \u0026lt; f.\u003c/p\u003e\n\u003cp\u003eIt is also obvious that any vendor that does not comply has no incentive to incur expenditure in maintaining a standard ‘x’ \u0026gt; 0, thus all non-compliant vendors shall be at x = 0. Similarly, there is no incentive for compliant vendors to go beyond ‘x’.\u003c/p\u003e\n\u003cp\u003eThe real life implication of the derived equation is that, given a sector where open competition profit of individual vendors is ‘b’, \u0026nbsp;a set-aside policy that reserves a fraction ‘m’ of the contract value for compliant vendors and the cost of compliance for a vendor being ‘c’, the fraction of vendors that actually will switch to compliance due to the set-aside policy is directly proportional to the quantum of set-aside benefit ‘m’ and the ratio of open competition profit to the cost of compliance (‘b/c’)\u003c/p\u003e\n\u003cp\u003eEvidently, as the government raises the standard of compliance x, the utility of such compliance (for the society) will go up, but the cost of compliance will also go up, while also reducing the fraction of vendors actually complying with the standard. Thus, after a certain stage, the benefits of higher standards would be overshadowed by reduction in the fraction of vendors that actually comply.\u003c/p\u003e\n\u003cp\u003eFinding the ‘x’ that will maximise the overall utility as is done in standard economic analysis.\u003c/p\u003e\n\u003cp\u003eSuppose that each vendor that complies with standard of human rights “x” creates a human rights utility g(x) for society. Using the concept of Caldor Hicks efficiency N.f. g(x) is the total utility created and N.f.c(x) is the total cost incurred (non-compliant firms do not incur any cost). “Optimal” outcome would be when,\u003c/p\u003e\n\u003cp\u003eN.f.g(x) – N.f.c(x) is maximum. This implies (all primes denote derivative w.r.t. ‘x’)\u003c/p\u003e\n\u003cp\u003ef’(g – c) + f(g’ – c’) = 0\u003c/p\u003e\n\u003cp\u003ei.e. (m.b.c’/c\u003csup\u003e2\u003c/sup\u003e) * (g – c) = (m.b/c) * (g’ – c’)\u003c/p\u003e\n\u003cp\u003e=\u0026gt; c’/c = (g’ – c’)/(g – c) \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp; \u0026nbsp;….(8)\u003c/p\u003e\n\u003cp\u003eIt is seen that “optimal standard” to be adopted is not influenced by the quantum of set-aside benefit ‘m’ or the open competition profits ‘b’.\u0026nbsp;\u003c/p\u003e\n\u003ch3\u003e2.3 Revisiting the Results with “Universality” as a Measure of Efficiency\u003c/h3\u003e\n\u003cp\u003eTill now an analysis of set-aside policy for its effectiveness in inducing vendors to comply with the stipulated standard has been done. This is generic and is not specific to human rights. Now analysing the result in eq.(7) not for optimising overall utility as done in eq.(8) but for achieving universality, i.e. the fraction ‘f’ should be as near to 1 as possible, in other words maximising the value of ‘f’. This becomes the definition of efficiency for the following analysis. From eq.(7)…\u003c/p\u003e\n\u003cp\u003ef = m/(c/b)\u003c/p\u003e\n\u003cp\u003eClearly, as m is always less than 1, c/b must always be \u0026lt;= 1, if f =1 is desired.\u003c/p\u003e\n\u003cp\u003eFurther, for any value of c/b, the ratio f can be increased by simply increasing m. However, the percentage change in ‘f’ consequent to change in ‘m’ does depend on (c/b). Thus, if c/b= 10, even if government increases the quantum of set-aside from 0% to 100%, the percentage compliance goes from 0 to 10% only. That is, if the cost of compliance is very high (compared with open competition profits), a set-aside policy may not be effective in inducing a substantial fraction of vendors to comply.\u003c/p\u003e\n\u003cp\u003eThis gives the result that for achieving universality:\u003c/p\u003e\n\u003cp\u003e1) \u0026nbsp; The cost of compliance should be reasonable (c \u0026lt; b). A value of c \u0026gt; b will never allow ‘f’ to reach 1\u003c/p\u003e\n\u003cp\u003e2) \u0026nbsp; The value of m should be as high as possible (preferably nearer to 1).\u003c/p\u003e\n\u003cp\u003e3) \u0026nbsp; Further, if an x is chosen such that c(x) \u0026lt; b, the fraction of vendors complying can be kept the same by increasing m and x together, which will improve the standard of human rights while keeping the fraction of vendors that comply the same.\u003c/p\u003e\n\u003cp\u003e\u003cem\u003eThus, from the perspective of objective of universality, optimal solution demands\u003c/em\u003e\u003c/p\u003e\n\u003cp\u003e\u003cem\u003e\u003cimg src=\"data:image/png;base64,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\"\u003e\u003c/em\u003e\u003cbr\u003e\u003c/p\u003e\n\u003cp\u003eThis implies that the government should establish standard for compliance ‘x’ at such a level that cost of compliance for vendors is equal to the open competition profit. Secondly, the quantum of preference should be 100%, in other words, nearly all the quantities should be reserved for compliant vendors only.\u003c/p\u003e\n\u003ch3\u003e2.4 Limitation of This Analysis:\u003c/h3\u003e\n\u003cp\u003eApart from the usual economic assumptions like identical vendors, ignoring economies/diseconomies of scale etc, an important assumption the analysis is about the pricing behaviour of firms. In particular, presuming that the compliant firms and non-compliant firms continue to follow identical pricing strategy even in the set-aside case. This may or may not be true. An increase in the quoted price (in terms of the mean of the probability distribution) can increase the percentage profits of a compliant vendor in a set-aside order while at the same time reducing the possibility of such vendor getting a competitive order. The exact analysis considering the possibility of a change in pricing strategy would require more involved analysis, but it is expected that the qualitative results of this analysis would remain valid even under this scenario.\u0026nbsp;\u003c/p\u003e\n\u003cp\u003eFurther, in one alternate policy prescription, where the lowest compliant vendor is required to match the price of lowest offer price of non-compliant vendor to get the set-aside order, the benefit of higher profit percentage in set-aside orders is lost and therefore pricing strategy may not have an impact on expected profits and therefore this analysis is expected to hold good in this situation too. This stipulation of price matching is not unusual and is in fact already in use, for example in set-aside policies in vogue in India where the preferential (compliant) vendors are required to match the price of non-compliant vendors to get the set-aside order.\u0026nbsp;\u003c/p\u003e"},{"header":"Conclusion","content":"\u003cdiv id=\"Sec14\" class=\"Section2\"\u003e \u003ch2\u003e4.1 Guidance for Policy Formulation on Set-Asides for Human Rights\u003c/h2\u003e \u003cp\u003e \u003col style=\"list-style-type:lower-roman;\"\u003e \u003cspan\u003e \u003cli\u003e \u003cp\u003egovernment should procure predominantly from compliant group only, and\u003c/p\u003e \u003c/li\u003e \u003c/span\u003e \u003cspan\u003e \u003cli\u003e \u003cp\u003ethe stipulated standard of compliance should be kept reasonable (such that its cost of compliance is below open competition profits in that sector) so that universal compliance is incentivised.\u003c/p\u003e \u003c/li\u003e \u003c/span\u003e \u003c/ol\u003e \u003c/p\u003e \u003cp\u003eThis result also highlights an important policy space for the State. A near 100% compliance is possible even if the quantum of set-aside is substantially less than 100%. For example, if 100% set-aside is not politically expedient for any reason, the state can still ensure 100% compliance from the vendors, albeit at a reduced standard. For example, even if m\u0026thinsp;=\u0026thinsp;0.5, universal compliance by vendors in this sector can still be ensured using set-asides if b\u0026thinsp;\u0026lt;\u0026thinsp;0.5c.\u003c/p\u003e \u003c/div\u003e \u003cdiv id=\"Sec15\" class=\"Section2\"\u003e \u003ch2\u003e4.2 Economic Definition of \u0026ldquo;Leverage\u0026rdquo; in BHR\u003c/h2\u003e \u003cp\u003eThis analysis also ties in well with the concept of leverage in BHR. In BHR, the states are expected to use their leverage with their business connections to engender respect for human rights in such connections. While leverage is broadly understood to mean the capacity of the state to influence the businesses it contracts with, and it is expected that the leverage would correlate with the quantum of business that a vendor gets from the state, this analysis permits us to arrive at a precise economic definition of \u0026ldquo;leverage\u0026rdquo;, as discussed below.\u003c/p\u003e \u003cp\u003eThe fraction of compliance \u0026lsquo;f\u0026rsquo; crucially depends on the ratio (b/c). Thus, in sector with high open competition profits \u0026lsquo;b\u0026rsquo; for vendors, government can set-a higher standard of compliance without bringing (b/c)\u0026thinsp;\u0026lt;\u0026thinsp;1 and therefore can expect 100% compliance even at such high standards. On the other hand, a sector with low \u0026lsquo;b\u0026rsquo;, the reverse would be true. Thus, this analysis indicates the open competition profit \u0026lsquo;b\u0026rsquo; is a good \u0026ldquo;measure\u0026rdquo; of state\u0026rsquo;s leverage in a particular sector. This can be used by states to adopt differential standards of human rights compliance in different sectors based on its \u0026ldquo;leverage\u0026rdquo; in that sector.\u003c/p\u003e \u003c/div\u003e \u003cdiv id=\"Sec16\" class=\"Section2\"\u003e \u003ch2\u003e4.3 Corroboration of Results with Empirical Findings\u003c/h2\u003e \u003cp\u003eThe open competition profit \u0026lsquo;b\u0026rsquo; itself depends on profit percentage \u0026lsquo;p\u0026rsquo;, Business volume \u0026lsquo;B\u0026rsquo; and number of sellers \u0026lsquo;N\u0026rsquo;. which therefore would be the determining factors for how well the set-aside policy can be used in ensuring compliance in a particular sector. Interestingly, this inference is in consonance with the empirical findings of Tkachenko et al that benefit of set-aside auctions depend on reserve price (which directly relate to profits percentages for bidders) and number of bidders. Thus, it can be said that this is a realistic model, and inferences therefrom should be relevant in the real world.\u003c/p\u003e \u003c/div\u003e"},{"header":"Declarations","content":"\u003ch2\u003eAuthor Contribution\u003c/h2\u003e\u003cp\u003eA.S. is the sole author\u003c/p\u003e\n\u003ch3\u003eCompeting Interests Disclosure:\u003c/h3\u003e\n\u003cp\u003eThe author has no conflicts of interest to declare that are relevant to the content of this article.\u003c/p\u003e"},{"header":"References","content":"\u003col\u003e\n\u003cli\u003eArrowsmith, S. (2010). 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Economic Analysis of Accident Law: A New Liability Rule that Induces Socially Optimal Behaviour in Case of Limited Information. \u003cem\u003eReview of Law and Economics\u003c/em\u003e, \u003cem\u003e17\u003c/em\u003e(1), 119\u0026ndash;131. https://doi.org/10.1515/rle-2019-0049\u003c/li\u003e\n\u003cli\u003eTkachenko, A., Valbonesi, P., Shadrina, E., Shagbazian, G., Camboni, R., Decarolis, F., Moretti, L., Podkolzina, E., Spagnolo, G., Schoors, K., Tadelis, S., \u0026amp; Vinogradov, D. (2015). \u003cem\u003eEFFICIENT DESIGN OF SET-ASIDE AUCTIONS FOR SMALL Efficient design of set-aside auctions for small businesses: an empirical analysis *\u003c/em\u003e. HSE-Moscow. https://www.economia.unipd.it/sites/economia.unipd.it/files/20190240-b.pdf\u003c/li\u003e\n\u003cli\u003e\u003cem\u003eTransforming our World: The 2030 Agenda for Sustainable Development. UN Doc No A/RES/70/1\u003c/em\u003e. (2015).\u003c/li\u003e\n\u003cli\u003eUnited Nations. (2011). UN Guiding Principles on Business and Human Rights HR/PUB/11/04. In \u003cem\u003eUnited Nations Human Rights office of the High Commissioner\u003c/em\u003e. https://doi.org/10.4324/9780429290817-17\u003c/li\u003e\n\u003cli\u003eUysal, E. (2021). Business and human rights: the state as a buyer. \u003cem\u003eEur. Procurement \u0026amp; Pub. Private Partnership L. Rev.\u003c/em\u003e, \u003cem\u003e16\u003c/em\u003e. https://heinonline.org/hol-cgi-bin/get_pdf.cgi?handle=hein.journals/epppl2021\u0026amp;section=10\u003c/li\u003e\n\u003cli\u003eZimmermann, M. (2017). Economic efficiency and the division of large procurement contracts into lots: An analysis. \u003cem\u003eEur. Procurement \u0026amp; Pub. Private Partnership L. Rev.\u003c/em\u003e, \u003cem\u003e12\u003c/em\u003e. https://heinonline.org/hol-cgi-bin/get_pdf.cgi?handle=hein.journals/epppl2017\u0026amp;section=59\u003c/li\u003e\n\u003c/ol\u003e"}],"fulltextSource":"","fullText":"","funders":[],"hasAdminPriorityOnWorkflow":false,"hasManuscriptDocX":true,"hasOptedInToPreprint":true,"hasPassedJournalQc":"","hasAnyPriority":false,"hideJournal":true,"highlight":"","institution":"","isAcceptedByJournal":false,"isAuthorSuppliedPdf":false,"isDeskRejected":"","isHiddenFromSearch":false,"isInQc":false,"isInWorkflow":false,"isPdf":false,"isPdfUpToDate":true,"isWithdrawnOrRetracted":false,"journal":{"display":true,"email":"[email protected]","identity":"researchsquare","isNatureJournal":false,"hasQc":true,"allowDirectSubmit":true,"externalIdentity":"","sideBox":"","snPcode":"","submissionUrl":"/submission","title":"Research Square","twitterHandle":"researchsquare","acdcEnabled":true,"dfaEnabled":false,"editorialSystem":"","reportingPortfolio":"","inReviewEnabled":false,"inReviewRevisionsEnabled":true},"keywords":"Public Procurement, Set- Asides, Economic analysis of law, Business and Human Rights.","lastPublishedDoi":"10.21203/rs.3.rs-4334054/v1","lastPublishedDoiUrl":"https://doi.org/10.21203/rs.3.rs-4334054/v1","license":{"name":"CC BY 4.0","url":"https://creativecommons.org/licenses/by/4.0/"},"manuscriptAbstract":"\u003cp\u003eSet-Aside policy is a common tool in public procurement to promote horizontal objectives like support to small businesses, domestic produce etc. Under set-aside policy, a fraction of the procurement volume (termed the quantum of set-aside) is reserved for vendors that comply with the condition/standards stipulated in the policy. In this paper, an economic analysis of set-aside policy in public procurement is made to find out the extent to which a set-aside policy can induce vendors to comply with the stipulated standards.\u003c/p\u003e\n\u003cp\u003eThe analysis is then extended to make a specific study on use of set-asides for promoting human rights in business connections of public procurement agencies. Under the United Nations Guiding Principles on Business and Human Rights, States are expected to utilise their leverage in public procurements to engender respect for human rights in their business connections. Set-asides for human rights compliance is a natural choice for achieving this horizontal objective of public procurement. The analysis departs from the traditional economic analysis and the usual economic conception of “maximum utility”. Instead, this analysis focusses on the notion of “universal compliance”, the hallmark of human rights discourse, as a measure of efficiency. This allows the researcher to suggest some practical measures that states can adopt for ensuring universal compliance by vendors with stipulated standards using set-aside policy. This analysis also enables the researcher to arrive at an economic definition of the term “leverage” used in the Business and Human Rights discourse which underpins the additional responsibility of states for protecting human rights in its business connections. The paper makes the following original contributions to the existing literature.\u003c/p\u003e\n\u003cp\u003eFirstly, a new economic model for set-aside policies in public procurement has been developed and used for understanding how and why the policy works to promote desired social goals. Secondly, a new concept of “maximum compliance/universal compliance” instead of “maximum utility”, as a measure of economic efficiency, is introduced and used for economic analysis of set-aside policy. Thirdly, an economic definition of “leverage”, as used in the field of Business and Human Rights, is presented.\u003c/p\u003e\n\u003cp\u003eJEL Classification: K23, K38\u003c/p\u003e","manuscriptTitle":"Economic Analysis of Set-Asides in Public Procurement: Advancing Human Rights Goals","msid":"","msnumber":"","nonDraftVersions":[{"code":1,"date":"2024-05-03 08:43:06","doi":"10.21203/rs.3.rs-4334054/v1","editorialEvents":[{"type":"communityComments","content":0}],"status":"published","journal":{"display":true,"email":"[email protected]","identity":"researchsquare","isNatureJournal":false,"hasQc":true,"allowDirectSubmit":true,"externalIdentity":"","sideBox":"","snPcode":"","submissionUrl":"/submission","title":"Research Square","twitterHandle":"researchsquare","acdcEnabled":true,"dfaEnabled":false,"editorialSystem":"","reportingPortfolio":"","inReviewEnabled":false,"inReviewRevisionsEnabled":true}}],"origin":"","ownerIdentity":"6945b912-edcb-4e29-90dc-6314c1e785c0","owner":[],"postedDate":"May 3rd, 2024","published":true,"recentEditorialEvents":[],"rejectedJournal":[],"revision":"","amendment":"","status":"posted","subjectAreas":[],"tags":[],"updatedAt":"2024-05-06T10:23:22+00:00","versionOfRecord":[],"versionCreatedAt":"2024-05-03 08:43:06","video":"","vorDoi":"","vorDoiUrl":"","workflowStages":[]},"version":"v1","identity":"rs-4334054","journalConfig":"researchsquare"},"__N_SSP":true},"page":"/article/[identity]/[[...version]]","query":{"redirect":"/article/rs-4334054","identity":"rs-4334054","version":["v1"]},"buildId":"qtupq5eGEP_6zYnWcrvyt","isFallback":false,"isExperimentalCompile":false,"dynamicIds":[84888],"gssp":true,"scriptLoader":[]}