Affirmative Action Subcontracting Regulations in Dynamic Procurement Auctions

I study affirmative action subcontracting regulations in a model where governments use auctions to repeatedly procure goods and services at the lowest possible price. Through using disadvantaged subcontractors, prime contractors build relationships over time, resulting in lower subcontracting costs in future periods. I find that regulation in the form of a minimum subcontracting requirement expands bidder asymmetries, favoring prime contractors with stronger relationships over those with weaker ones. Simulations show that the manner in which relationships evolve determines not only the utilization of disadvantaged subcontractors but also the procurement costs attained under affirmative action.