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