Public Expenditure, International Specialisation and Agglomeration

It is widely recognised that public-sector purchasers tend to favour domestic suppliers. We study the consequences of such home-biased public procurement on international specialisation. Using a general-equilibrium model with a monopolistically competitive sector, we find that a country will specialise in that sector if it has relatively large home-biased procurement (the “pull” effect). Furthermore, home-biased procurement can counter agglomeration forces in that sector and thereby attenuate the overall degree of international specialisation (the “spread” effect). Our empirical analysis, conducted on input–output data for the European Union, yields supporting evidence for the pull effect and some support for the spread effect.